By O.A. Cleveland, Consulting Economist, Cotton Expert
September 27, 2022
No doubt it is the economy, stupid. James Carvell’s line is much easier to visualize this week than last. Cotton fell to near the dreaded 90 cent mark as Friday’s (Sept. 23) trading saw limit down action and took the weekly settlement of the December futures contract to 92.54 cents. On its own fundamentals, one has difficulty in seeing cotton trading below the dollar mark.
However, cotton – when viewed as an industrial commodity in the world marketplace as opposed to an agricultural commodity – is swamped by the macroeconomic concerns of the world with words such as recession, inflation, and stagflation, plus acronyms like FED. Couple these with phrases such as rapidly rising interest rates, mismanaged fiscal policy, and a meltdown on Wall Street, then cotton traders best run for cover, especially when compared to the grain and oilseed markets.
Of course, all these words have the economists singing their tunes – mostly offkey, but nevertheless singing. Cotton growers are left holding the bag, as they never expected to be part of the economist’s alphabet soup. Yet, they are.
Cotton is undervalued. But then, mills have only a limited demand for yarn. Thus, they remain extremely reluctant buyers of raw cotton. Until buying picks up, there is little reason for cotton prices to retrace the selloff and return to the one-dollar mark.
However, mills do recognize that they can replace yarn in inventory with lower priced yarn and will continue to shop for nearby shipments of cotton.
Surely, the 90-cent mark will uncover enough price support to keep the market afloat. However, the uncertainty of the U.S. and the world economies are being traded now, not cotton. Uncertainty is in the headlights, and we cautioned you last week that market prices decline in the face of uncertainty.
Again, cotton is not being traded on the contract just now, but rather on world economic uncertainty. The U.S. and world economies represent a proxy for cotton on the ICE contract.
Demand remains extremely poor, worse than expected. The most recent week showed only 13 countries were in the market for U.S. cotton. Of equal importance, five of those countries registered cancellation of prior sales greater than the volume of cotton they purchased this week.
Weekly sales totaled a net of only 32,400 bales of upland, an extremely poor week. Shipments fared much better, totaling 232,300 bales. Shipments to date for the 2022-23 marketing year are some 300,000 bales ahead of the 2021-22 season pace at the same time last year. Total sales are even stronger, currently running about one million bales ahead of last season’s pace.
However, the pace of this year’s sales and shipments is slowing. Pakistan remains as the season’s best buyer, not surprising given the major flooding faced by that crop this year. Pakistan will continue to be a strong buyer of U.S. cotton.
Mills continue to fix prices at a faster pace than in the prior two years. Mills fixed 91,800 bales (December futures) last week and have been continually active at fixing the price on December futures for six weeks.
These fixations have provided some support to the market. But, as mentioned three times now, overall U.S. and world economic uncertainty has simply dwarfed cotton supply demand factors. Weekly trading marked the first week of the past seven that saw December fail to trade above the one-dollar level.
It should be noted that certificated stocks continue to fall – an indication of the tightness in the availability of quality stocks, as well as an indication that early harvested cotton should find favor in the export market.
Cotton prices should be well supported above 88 cents in December. But again, the macro factors have taken control of the market and could make for more price weakness. Nevertheless, cotton is very undervalued in the low 90s, and prices should begin to recover some of their strength.