In the last week of 2022 (December 27-30), trading in ICE cotton futures was quiet on New Year’s Eve, and prices continued to fall. The main March contract fell by 1.84 cents, or 2.2%. Throughout 2022, the main ICE cotton futures contract has fallen by 26%. After a rebound at the end of the year, the current market continues to stabilize above 80 cents.
In the past month or so, adjustments to China’s epidemic prevention policy have brought hope to the cotton market. With the liberalization of the Chinese market, demand for various commodities will recover significantly in the future. Recently, the overall upward momentum of energy and other commodity futures has continued, creating a good atmosphere for the continued recovery of cotton prices. Cotton is particularly sensitive to changes in this economic situation. As the Federal Reserve gradually slows down its interest rate hikes, the US dollar trend turns from strong to weak, and the external market shows recovery momentum, ICE futures prices bottom out and rebound.
At present, the peak period for new cotton listings in the northern hemisphere has passed, and the pressure on new cotton supply has significantly weakened. The market will focus more on the recovery of the consumer market and cotton planting intentions next year. Due to the sharp drop in cotton prices, current cotton is obviously uncompetitive compared with competing crops. It is generally believed that the cotton area in the United States will decrease by about 20% in 2023, with recent forecasts of only 9.6 million acres. Of course, cotton planting and production will also undergo dynamic changes. On the one hand, rising prices may reduce the area. If the contract in December 2023 stabilizes above 80 cents and continues to rise to 85 cents in the future, the US cotton planting area will also increase. The possibility of recovery, and the increase in cotton yields in many areas of the United States in 2022, will bring variables to the supply of US cotton in the new year.
With the liberalization of the Chinese market, cotton demand recovery is just around the corner. Compared with a month or two ago, cotton supply and demand conditions have undergone significant changes. Although consumption is still at a low level at this stage, the expected consumption growth is getting closer. Outsiders believe that although the demand in the Chinese market will be affected by the shock wave of the epidemic in the short term, the consumer market after the Spring Festival is worth looking forward to. The demand for domestic cotton and imported cotton will recover significantly from February to March 2023. In 2023, an improvement in the cotton supply and demand situation will guide price trends, which will still be accompanied by pressure from the Federal Reserve to raise interest rates.
Generally speaking, unless there is a “black swan event” similar to the Russia-Ukraine war, the general trend of price recovery can be determined. According to people familiar with the matter, the fund has listed cotton, which performed the worst last year, as a variety with low valuations in the new year, and there is a trend of increasing investment in cotton futures in the future.
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