For the past few weeks, the market has looked like a rusty old truck trying to climb a rainy dirt road. Every time it seems to build up traction, it slips and slides lower down the slope. That’s until last week when he posted his first positive performance in six weeks.
Friday’s close above 90 cents was admirable considering it was an eight cent bounce off the previous week’s intraday low. This was largely due to a dearth of economic news, a good week on Wall Street and a drop in speculative selling. Additionally, this was helped by short hedging by factories, seeing the price drop as an opportunity to repair some of their call sales.
Last week, it rained in many parts of the south-central and southeast. Even so, the overall crop condition remains about the same, with 38% rated good to excellent, compared to 60% in 2021. Worse still, more than a quarter of the crop is rated poor to very poor, while only 9% fall into this category. Last year.
Obviously, a harvest of this condition will not match last year’s 17.5 million bales and is likely to be lower than the current USDA estimate of 15.5 million. The world’s largest cotton field, West Texas, is on course to produce a crop less than the 3.5 million bales it made in 2011. If so, in the absence of a barn crop in the east, US production is expected to drop to around 14 million bales.
Such a shortfall, on top of already tight opening stocks, should provide the necessary support to the market.
Last week’s export sales, combining all three marketing years, were not wildly bullish but respectable at 211,100 bales with participation from 18 different countries. Shipments of 336,100 bales represented an improvement on the previous week, but still trailed export estimates with just two weeks remaining in the marketing year.
However, there are discrepancies between government agencies in the number of bales currently shipped, which might make these numbers look better.
The potential for sales cancellations is worrisome every week. Again, cancellations were minimal at just 31,800 balls. For reference, during the market downturn in 2011, weekly cancellations often exceeded 300,000 bales.
As mentioned, the market had very little economic data to react to last week. Most notable was a slight increase in jobless claims which could be a precursor to a recession. Unfortunately, China has imposed another round of Covid shutdowns.
Reports indicate that 250 million Chinese are prohibited from working, a number greater than the entire population of the United States. Right now, such actions can only have a negative effect on their economy and that of others around the world.
The Federal Reserve will meet later this week with an additional interest rate hike on its agenda. Most are expecting another 75 point increase in the rate, but there’s a 25% chance it’s going to be more aggressive. Whatever they decide, the US dollar, currently at its highest level in twenty years, will strengthen further, which could hamper our export competitiveness.
Where to go from here? Already trading a short crop, the market is desperate for a better indication of demand. So far, signs of a significant drop in consumption have been few despite a struggling global economy that would favor such a drop. It will likely take weeks, if not months, for this to fully unfold.
In the meantime, we expect the market to trade in a wide range from a low in the mid-80s to a high around the dollar. Support on the lower side will come from additional short trade coverage, as factories see any price declines as an opportunity to fix more on demand sales.
Currently, there are six million bales of sales on call in December. Keep in mind that a growing volume of on-call sales is a big part of buying power, as it was last year.
On the higher side, a one-dollar return will be encountered by a producer selling especially those who may have missed it the first time, thus providing resistance.