In the first week of the new year (August 1-5), after five consecutive increases in the previous week, ICE cotton futures prices were indecisive between supply concerns and declining demand, and prices still maintained a stable trend. As USDA’s supply and demand forecast approaches, the market’s expectations that the reduction in U.S. cotton supply will soon materialize has increased. As of August 5, the December contract closed at 96.13 cents/pound, down 0.61 cents from the previous week, and the market continued to consolidate in a narrow range above 90 cents.
Judging from the situation in the past week, with the occurrence of rainfall in the cotton-producing areas of the United States, the rate of high-quality cotton in the United States has increased from 34% to 38%, and the seedling situation in Texas has improved significantly. However, while drought conditions have eased in southern Texas and Oklahoma, drought conditions continue to worsen in western Texas. In the coming week, western Texas will continue to experience high temperatures and low rainfall. Therefore, concerns about U.S. cotton supply have not eased at all, and market expectations for the USDA to significantly reduce U.S. cotton production are still strong. Moreover, as the drought continues to develop, US cotton production will not be adjusted in place at once, and may continue to decline in the future.
The net contract volume of U.S. cotton exports has been negative for two consecutive weeks. As of the week of July 28, less than 10 countries and regions had signed contracts for U.S. cotton exports, 16 had canceled contracts, and China had canceled more than 20,000 tons of contracts. However, with the support of weather factors, ICE futures are indifferent to the continuous decline in U.S. cotton exports, relying on the reduction of U.S. cotton production. Moreover, according to USDA statistics, as of July 28, the cumulative volume of cotton contracts signed in the United States for the new year has reached 4.828 million bales, which is much higher than the 3.314 million bales in the same period last year and is the highest level in the same period since 2018/19. At the same time, there are still 7.35 million bales of US cotton unshipped in 2021/22, and the market believes that a large amount of cotton will be carried over to 2022/23.
According to the analysis of foreign cotton professionals, judging from the performance of the entire commodity market, the early market decline was largely not caused by man-made factors. Artificial intelligence such as “algorithmic trading programs” played an important role in this process, causing almost all commodities to fell at the same time. Now, energy, grain, metals and other types of products with good fundamentals now have good buying opportunities. For cotton, although the possibility of funds continuing to be short cannot be completely ruled out, and inflation will be suppressed by interest rate increases, inflation will not completely disappear. In this context, the possibility of funds shorting the market is not high. Coupled with the support of cotton’s own fundamentals, cotton prices do not have full downward momentum. In fact, the fact that U.S. cotton signings were so dismal that they did not trigger a market sell-off also explains some problems.
The new year has begun. To what extent global inflation and economic recession will affect cotton consumption and whether supply problems can offset the decline in demand are the focus of the market at this stage and will also form the market outline of the new year. For now, the slowdown in global textile downstream orders has greatly suppressed cotton consumption. Cotton prices have little room for upward growth and will continue to consolidate in the short term.
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