No Broken Record: Demand Keeps Cotton’s Hits Coming
January 31, 2022 Straight from the classical Hit Parade, the cotton market played the dollar tune well over 100 times in Friday’s (Jan. 28) explosive day.
For the second consecutive week, all contracts established life-of-contract highs. Last week the market backed off on the close, but this week’s settlements were strong. The week concluded with a significant outside trading range day and suggests more price highs are coming as the demand for cotton yarn is, in a word, insatiable.
The demand for yarn, both in the U.S. and around the world, is simply not being met. Domestic spinners are facing a shortage of trucks to move yarn. Of course, truck availability has been the primary impediment of reaching export projections. The immediate needs of spinners are going unfilled both in the U.S. and globally.
Too, the new crop December contract traded over the magic dollar level well more than 110 times on Friday.
Given the prospect that the cotton supply chain will remain fractured into 2023, the prospect for a strong market is forecast for the entire year. Of course, the saber rattling by the Chinese and Russians can interrupt bullish markets at any time. Yet the demand for feedstuffs, food, and cotton will be difficult to meet – all of which tends to promote very favorable prices but will also challenge agriculture due to inflation impacted input costs. Growers are facing the most expensive input costs in history.
Adding to the bullish sentiment is the prospect that Chinese old crop estimates are too high and additional Chinese buying is a must. Of course, informal sources – usually accurate – suggest that the Chinese will begin a new round of buying.
I would be remiss if I did not take a moment to recognize the life and legacy of the late Ed Jernigan, or Eddie Dean as I called him. Ed was the world’s preeminent market analyst. He left us far, far too soon. He was the first to call on the international press and the western world to recognize that China was practicing genocide, slavery, and promoting child labor in the region of Xinjiang. He led the charge for much of the world’s existing ban of Xinjiang cotton and manufactured goods. He is enormously missed. (A side note, Ed told me the U.S. might export only 14 million bales – a million bales below USDA’s current estimate?)
World textile mills continue to report profitable yarn margins and, thus, the continued demand for cotton. China, Pakistan, Bangladesh, and Vietnam are all very strong buyers of cotton. Yet, world textile mills are facing the dilemma of rising prices. More importantly, the futures market on-call position that mills are facing is extremely bullish.
More so than demand today (and demand is very important!), the mills’ untenable on-call positions are propelling the market higher. Mill on-call sales that we seem to write about every week are historically bullish. Compared to a year ago – or any time ago – mill on-call sales are engulfing mill on-call purchases.
Every week we point out on-call sales directly imply the necessity of buying futures contracts, and mill on-call purchases imply the necessity of selling futures contracts. A rather naive comment is that buying tends to push prices higher and selling tends to push prices lower. The “law” of the cotton world requires that this buying and selling of futures contracts be done on current marketing year futures contract months. While traders can roll or move forward their actions within a marketing year, they cannot roll the buying/selling to a new marketing year.
The remaining futures contracts for the 2021-22 marketing year are March, May, and July. Imbedded in the data is that some 12,035,700 bales must be bought using futures versus only 1,613,900 bales that need to be sold. Speculators have memorized these relative numbers and, with every uptick in price, become that much more bullish, adding to their long futures positions.
Since export sales remain very positive, speculators have become very active in pushing prices higher. They will continue. There is a limit, but I do not see it. The market has already begun simply trading these “on-call” statistics. Sooner or later, what has gone up will fall. This has become a no man’s land.
The last time I recall such a situation, I stopped forecasting futures prices once the market reached $1.50 a pound. Will the May or July futures price ascend to such a level? I do not know. Again, this is a no man’s land.
The Chinese Lunar Year has begun. Trading could be lighter with China on holiday all next week and the market should be calmer, but downside activity is more limited than upside potential.
Two final thoughts:
- Price activity has been relentless in following the 10-day moving action.
- How often can you hedge, before planting, at $1.00?
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