Speculators, Mills, and Mother Nature Now Driving Cotton Prices
April 4, 2022 It’s not over. Old crop May and July futures contracts will shoot for higher highs – 150 cents, maybe, maybe not – but the ride will be wild.
It’s no longer about cotton demand, but rather, mills must get out of the market. Nothing more. Volatility will be a challenge. The mills will be helped by the beginning of the Index funds rolls (sell May, buy July). The Index trading will provide mills the opportunity to fix prices (buying May futures).
Predicting old crop price activity is very much a gamble now as almost all trading is in the hands of speculators. The closer we get to first notice day on the May contract (April 25), the more likely the possibility of near limit up and limit down price activity occurring the same day. Yet, there is scant cash cotton trading at present. Most all trading is speculative activity and will remain so until the July contract moves near expiry. The limited business that is occurring involves mills using on-call sales – as if to put a dagger in their own back.
A very small handful of growers are wishing and hoping for 150 cents or even more. Yet, it’s much better for the cotton industry for prices to drop back to 120 cents or below. The textile industry is on the cusp of switching from spinning cotton fiber to using the acid based non-sustainable polyester fiber. Mills can barely hang on a while longer with 10-15 cent lower prices, but not at current prices. The market has excellent price support at 120 cents, basis old crop and 105 cents, basis new crop.
New crop prices will be determined by Mother Nature’s decisions of whether the vast Texas and Oklahoma acreage receives timely moisture. New crop price support is more vulnerable due to the possibility of timely rains – a very big if. Currently the target for the new crop December contract is 125 cents.
Speculators, for the most part, are the only traders left. They know mills are trapped needing to buy futures to fix the price of cotton they previously purchased. This is the on-call sales versus on-call purchases, a unique trading method only used in cotton trading. We have discussed this all season, because it surfaced early in the year as a very important market fundamental. The on-call trading has driven cotton prices some 20 to 30 cents higher than prices would have likely gone in the absence of this unique trading practice. Speculators will continue to squeeze textile mills.
Yet, any reasonable probability of lower prices is very weak. There will be price breaks and, once July become the lead month, there will be a very strong price break. Yet, old crop will most likely hold above 120 cents. Again, mills are simply caught on the wrong side of the market, have waited too long to exit their positions, and are paying dearly for their actions.
The annual March Prospective Plantings report released by USDA indicated U.S. cotton growers intend to plant 12.2 million acres in 2022 – up 9% or 1.01 million acres from 2021. Southwest acreage plantings intentions totaled 7.445 million acres, or 60% of expected total U.S plantings. This is the region of the greatest potential drought stress this season.
The Southeast is expected to plant 2.513 million acres – 21% of the U.S. total – while the Mid-South is expected to plant 16% of the total, or 1.930 million acres. The Far West region and all Pima acreage is expected to account for only 3% of U.S. plantings: 170,000 acres of upland and 176,000 acres of Pima. Total upland planted acreage is forecast at 12.058 million acres.
The next plantings report will be USDA’s Planted Acres report in June.
The very bullish on-call sales versus on-call purchases have made their mark on the market and carried prices beyond expectations. The existing ratio, now 8.2 to 1, is at its highest level of the season and is unchanged from last week. Again, prices will continue to be favorably influenced by this ratio. However, the closer to first notice day, the less important as a price predictor the ratio becomes.
However, between now and June 24, there are some 8.8 million bales that must be fixed (buying futures) versus some 1.1 million bales that must be sold (selling futures). Thus, market support above 120 cents, and most likely 130 cents, is extremely strong.
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