This spring, the fight for acres in the United States occurred across multiple grain and oilseed commodities. Cotton futures got swept up in the action.
If you remember, cotton was one of the nine grain and oilseed commodities that were low on ending stocks, and thus needed to attract as many acres as possible last spring in order to increase production, and hopefully, ending stocks.
That’s why in May of 2022, there was a dramatic price acceleration higher, with front-month cotton futures trading up to 156.64 cents per pound – the highest they had been since the summer of 2011!
While there have been quite a few zigs and zags for prices since that price high occurred in May, most recently, cotton futures have endured a gut wrenching sell off as the September USDA report showed an unexpected increase in supplies.
In response, cotton futures prices plunged lower, with selling augmented due to a combination of technical selling, global recession fears, and a higher U.S. dollar.
Finally this week, the December cotton futures may have put on the brakes, digging in its heels at 92.38, and posting a bullish key reversal on the day, which can be viewed as a technical bottoming signal.
Low domestic supplies
Due to the hot summer, U.S. cotton yield is not as high as hoped. On the September USDA report, yield was pegged at 843 pounds per acre on the national scene, down from 846 the month prior. Normally this type of news would have sent cotton futures prices higher; however, USDA showed an increase in planted acres on the September report.
USDA increased acres to 13.79 million acres, up from 12.48 the month prior. Had the USDA not increased acres, the reality of lower yields would have reduced ending stocks for cotton to a dramatically small number. Instead, because higher acres helped to offset smaller yield, total production was actually increased to 13.86 (million 480-pound bales) up from 12.57 the month prior.
This larger increase in production weighed on cotton futures, sending prices lower.
But prices are now likely too low and are in bargain buying territory. Because the bottom-line reality is that ending stocks for U.S. cotton are still historically tight. 2022/23 ending stocks for U.S. cotton are at a low 2.7 (million 480-pound bales), down from 3.75 in 2021/22.
Global stocks trend lower
Let me help paint a picture of where cotton is grown in the world. According to the most recent USDA report, overall global cotton production for 2022/23 is 118.45 (million 480-pound bales).
The world’s leading cotton producers are: China (28.00), India (27.50), the United States (13.83), Brazil (13.00), Australia (6.0), Pakistan (5.5), and Turkey (4.4).
China and India use everything they grow and also rely on imports to meet overall demand. Brazil, the United States and Australia are primarily cotton exporters.
Due to the recent horrific flooding in Pakistan, the country’s production is expected to decrease, and Pakistan could be a more active importer this year than normal.
Ending stocks on the global scene, like so many other grain and oilseed commodities, are also trending lower. Global ending stocks for 2022/23 are pegged at 84.75, down from 84.79 in 2021/22, and down from 88.45 in 2020/21.
U.S. harvest approaches
The weather looks generally drier except for some wet regions of the Delta over the next five days. The generally dry weather should be favorable for harvest. As of Monday’s weekly crop progress report, 11% of the U.S. cotton has been harvested, right on pace with the 5-year average.
Currently 59% of the U.S. cotton crop has bolls opening, up from the 5-year average of 51%.
This might make for a quick harvest, which is perceived as welcome news, because so far hurricane season has been pretty quiet. But should one storm come screaming up the Gulf and make landfall in Texas or Louisiana, you can kiss what is left of this parched, lower-yielding cotton crop goodbye. And that would worsen an already tight supply story.
When looking at both the 5-year and 15-year seasonal patterns for December cotton futures, there is a very strong tendency for futures prices to find a seasonal low during the last week of September, with prices working higher into late October.
With as technically oversold as this market is, along with the underlying bullish supply fundamentals, cotton futures look poised to have potentially found a short-term low.
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