Thompson on Cotton: Gift To Those Still Holding Current Crop Cotton
April 4, 2023
Upon posting losses six out of the past eight weeks, the market was clearly in an oversold position and poised for a retracement. So last week’s market rebound wasn’t totally unexpected, it was the extent of it that took everyone by surprise. After losing almost eleven cents in a two-month period, falling to a low of 76.54, May futures with the help of two limit-up trading days recaptured over half of these losses closing Friday at 82.78. December futures traded similarly, rebounding five cents to close at 83.42. The catalyst was spec short covering early on followed by another week of strong export sales and no surprises in USDA’s prospective plantings allowing the market to hold onto these gains.
Also, lending favor to the market was the absence of any dire economic news. The only data of importance released last week was a revision in the fourth quarter gross domestic product. GDP, seen as a key indicator to the overall health of our economy, was lowered from an earlier estimate of 2.9 percent to 2.1 percent. This decline in economic growth was largely the result of consumer spending falling two percentage points in the last three months of 2022. Quite frankly, this is a double-edged sword. A decline in growth will hopefully lead the Fed to temper their hawkish ways while at the same time a decline in consumer spending does little to strengthen the demand for cotton.
As mentioned, we continue to be encouraged by another strong week of export sales and shipments. Net current crop sales were 291,400 bales with shipments of 348,400 bales. The latter, once a major concern, was up twenty-five percent from the previous week while far exceeding the weekly average of 253,000 bales needed to meet current export estimates. China and Vietnam remained the primary destinations. However, most encouraging Turkey and Pakistan received a significant volume despite their physical and financial hardships.
Friday’s release of 2023 prospective plantings were highly anticipated by all. Though fewer cotton acres were expected given current prices, traders were anxiously awaiting to what degree. USDA now estimates 11.1 million acres will be planted to upland cotton as compared to 13.6 million last year, a decline of 18 percent. Do understand though this will serve as the benchmark currently being traded, abandonment and yields are still highly questionable with harvest months away. The market’s relatively neutral immediate reaction indicates these numbers were already being traded, taking no one by surprise. Below is a closer breakdown by state.
Alabama – 400,000 acres down 8 percent
Georgia – 1.2 million acres down 7 percent
Carolina – 360,000 acres down 23 percent
Texas – 6.2 million acres down 21 percent
Where to from here? This return to the 80’s should be viewed as a gift to those still holding current crop cotton. With a large volume of GTC orders being placed at 85 cents expect formidable resistance at this level. This, coupled with macroeconomic factors still precariously hanging over the market, strongly suggests pricing here. Not to mention there are only a few trading days left before FND on May. As for new crop, with more time on our side and hope on the horizon, one can be patient. Even so, a return to the upper 80’s would be a good place to begin pricing new crop while hoping you are wrong and continue pricing on a scale-up basis as the market moves higher.