Volatility Has Cotton Dancing a One Step, Two Step Tango
March 7, 2022 A good case of the coronavirus and Russia wanting to thump its chest finds the market down 500-plus points lower than our last report. As many readers already know, Covid can take one down to their knees. I am a believer now.
As predicted, Russia’s invasion of Ukraine did take cotton down some five cents. The front end of the market’s nerves was exposed going into the weekend, and the May and July contracts exhibited more weakness. Yet, the market continues to struggle with the Russian atrocities as trading has become very volatile, seemingly taking one step forward and two steps backward.
Going into the weekend, the market was obviously spooked, and short-term cotton traders did not want to be long. Cotton had been the favored child on Wall Street and with speculators, but grains and oilseeds have taken over that role now. As such, speculative money has exited cotton in favor of the grain/oilseed complex.
Cotton has jumped from overbought to oversold in just three trading sessions, but downside support is still some two cents below, at 98 cents in new crop and at 115 cents in old crop. Nervousness surrounding war activity over the Saturday-Sunday two-day weekend provided all of the market’s weakness during Friday’s (Mar. 4) bearish trading.
The Chinese cotton complex has appeared to find support and should hopefully hold firm in its weekend reopening. Thus, market activity on Monday (Mar. 7) should find support from the Chinese ZCE market. The May contract’s objective is a heretofore paltry 119 cents, and December is looking to return to 102-103 cents. The USDA March supply demand report on Mar. 9 could provide guidance, but USDA has been a bit slow to record the weakness expressed by the export market.
The “weakness” in cotton, relative to the super strength exhibited by the oilseeds/grains complex, should not be surprising. Europe, and particularly Ukraine, is a major wheat producer. It is also an important corn and oilseed producer. Neither Ukraine wheat nor corn will likely be harvested. Take away a major world producer and exporter and, as expected, prices have exploded. Too, the Black Sea ports are either closed or are open only at the will of Russia. Thus, the availability of the big Romanian grain production is in question.
The On-Call report showed an even more bullish suggestion of price activity than last week’s report. World textile mills continue buying cotton for second/third quarter delivery and electing to fix the price on either the May or July futures contract. On-call sales for both the May and July contracts increased on the week. Fixations on the May contract now total 2,949,500 bales. Fixations on the July contract total 5,339,200 bales.
On-call purchases against both of those contract months are only a combined 900,000. Thus, the ratio of buying to selling futures contracts on those two months is about 7.7 to 1 – an extremely bullish indicator, even more so than in the past few weeks.
Of course, this is the same conclusion we have given week after week…just as prices have increased week after week. Yet, time is rapidly running out for the buying to occur – roughly only four months now.
The trading week was much quieter than recent weeks, an indication that the market took a bit of a break in preparation to ratchet higher in both old crop and new crop months. Stay with trend. Yet, new crop pricing deserves serious consideration. The market has a solid base in the upper 90’s for new crop. Yet, despite high production costs, it is offering a rewarding premium to growers. Take some.
As we have said many times, if you like the price enough to plant it, then like the prices enough to price some.
Give a gift of cotton today.
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