In the last week of June, the panic caused by the macro shock was released. Textile mills’ bargain hunting and bargain hunting supported cotton prices and then stabilized and rebounded. ICE cotton futures hit a low of 91.20 cents during the session, and the highest rose to nearly 100 cents, and closed at 97.48 cents on Friday, which was almost the same as a week ago.
Halfway through 2022, cotton has returned from the end to the starting point – starting again from the starting point of 90 cents in December last year. What will happen to cotton this time?
Along with the decline in futures, the cotton spot market quickly improved. According to market news, during the current round of cotton price declines, buyers including China, Vietnam, India and other countries accelerated the pace of signing contracts at 100-110 cents. After the price fell below 100 cents, countries became more enthusiastic about signing contracts for US cotton for the next year. According to the latest U.S. cotton export weekly report, the U.S. cotton contract signing situation has improved significantly, and the large number of contract breaches that the market is most worried about has not occurred. This makes the market somewhat relieved. Upstream demand currently does not appear to be collapsing. And with the official entry into force of the Xinjiang cotton ban, the demand for foreign cotton and yarn is increasing. According to feedback from traders, the sharp drop in floral yarn prices has surprised the market. Export-oriented companies even started large-scale purchases before the sharp drop.
From the perspective of supply, last week the U.S. actual sown area report was finally released. The actual sown area of U.S. cotton in 2022 is 12.5 million acres, which is higher than the intended area of 12.23 million acres in March and also exceeds the market forecast of 12.19 million acres. Although the data is relatively bearish, it is not the area that ultimately determines U.S. cotton production, but the yield and rejection rate. The new cotton growing season in the United States has just begun, and it is still facing many uncertainties in the later period. This uncertainty will currently provide good support to the market. According to the latest weather forecast, the recent drought in Texas is still developing, and the situation in the south-central and southeastern regions is also worsening. In particular, the seedling situation in Texas continues to deteriorate. All of these have an impact on the harvest area and yield of US cotton. Very important impact. Foreign institutions and analysts believe that if the drought in Texas cannot be alleviated, there is room for U.S. cotton production to continue to decline.
Regarding macroeconomic impacts, the current decline in commodities comes from the market’s early pricing of recession expectations. This expectation comes from the disillusionment of hopes for a natural fall in inflation after the release of the U.S. CPI in June, and the market has reached consensus on the Fed’s idea of raising interest rates to curb demand. However, as the actual weakening of demand has not occurred, the global economy is far from entering a recession. Therefore, after recession expectations cause commodities to fall sharply, market trading should stop and wait for the actual direction of the economy. In this process, the resilience of energy and food is expected to be highlighted. In addition, the market now has high expectations for the Federal Reserve to significantly raise interest rates in the later period to suppress the economy. Some institutions have predicted that once the economy shows improvement after the “strong medicine”, the Federal Reserve’s policy will change at any time. For cotton, if there is no obvious disruption to fundamentals, the market will reposition itself in a relatively short period of time.
Judging from the above situation, the December ICE cotton futures contract is likely to continue to rebound, but without the help of speculative bulls, the market is still likely to retest the support below, and there will be strong resistance to continued upward movement. Although textile mills’ pricing will continue to provide support to the market, the current market environment is extremely unstable, and it is absolutely impossible for textile mills to excessively chase increases. In order for funds to return, the market must have real positive factors or the macroeconomic situation will improve. In the short term, this is unlikely to happen.
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