The holiday-shortened week ending Thursday, July 2 saw most active ICE cotton futures stair-step over the 60 cent hurdle and keep going (see graph above courtesy of Barchart.com). Chinese and world cotton prices were mixed/flatter over the same period.
Fundamental influences this week included a focus on heat/dryness in the Southern Plains, plus a surprisingly low U.S. planted acreage number from USDA. Thursday saw weak (not unusual) old crop and ok new crop U.S. export sales. Higher certified stocks suggest a continued weakening of commercial demand, which remains reportedly slow.
Other influences this week included low volume trading early and then presumed rebalancing of index funds over July 1-2. The latter was evidenced by higher volume, increasing open interest, and higher settlement prices, perhaps assisted by technical buying and continued weakness of the U.S. dollar.
Ultimately, the market can’t avoid the bearish implications of USDA’s old crop balance sheet and the negative spillover effects for the 2020/21 situation. The June WASDE numbers reinforced the previous two month’s projections of lower consumption and higher ending stocks. Recent indicators of reduced demand include a 79% decline in U.S. clothing store retail sales in April, and a correspondingly large decline in estimated consumer spending on apparel. Even May’s recovery of U.S. clothing retail sales is still below normal levels, so we’ll have to see.
The longer term damage to cotton consumption by the COVOD-19 pandemic will surely take many months to resolve. If there was a near term medical quick fix to the spread and effects of COVID-19, I would expect only a partial relief in commodity and equity markets. The “fear and panic” portion of the decline in cotton prices might keep ICE futures over 60 cents, perhaps reaching the mid-60s. But the repairs to cotton’s global supply chain and consumers’ willingness to buy apparel may take longer to normalize. Hence a return to profitable price levels may not happen during 2020.
From a marketing standpoint, both old crop and new crop cotton prices remain at the low level of the federal program price support. In government-speak, the adjusted world price (AWP) remains below the 52-cent loan rate. This makes for positive loan deficiency payment (LDP) rates for those who sell their cotton in the cash market (being careful to maintain beneficial interest). So the worst having happened (knock on wood), there isn’t much sense in paying for more downside price protection.