Commodities report

Global Impex USA: Sharp declines felt in cotton futures

Posted March 8, 2021

 

ST. CLOUD, Minn. – May 2021 cotton futures were stable throughout the week, but fell sharply on Thursday, March 4, midsession following comments from Federal Reserve chair Jerome Powell.

 

May 2021 cotton futures finished at $0.8714, down 1.25% on the day. July 2021 cotton futures finished at $0.8813, down 1.29% on the day. December cotton futures finished at $0.8400, down 1.22% on the day.

 

These sharp movements downward in the cotton futures market reflect two main themes that have been driving the market over the past few weeks. First, concerns over inflation and the Federal Reserve’s hesitancy to take a stance on it have caused investors to believe that the U.S. economy might be overcharged in coming months. The dual impact of increasing COVID-19 vaccinations and the prospect of a new $1.9 trillion stimulus package on the horizon have continued to cause investors to believe that the U.S. economy is in a sharp recovery now.

 

These fears were present in weeks past but have continued to culminate due to the announcement by the Biden Administration that they plan to have enough vaccines for every U.S. adult by the end of May 2021. This confidence shown by the president is driven largely by the approval of the one-shot Johnson & Johnson vaccine and increased supply from both Moderna and Pfizer in coming months.

 

These fears were not assisted in any way by the shaky response given by Powell on Thursday. His instance in past weeks that the Federal Reserve sees no reason to increase rates in response to inflation concerns has been a steadying force in the markets. However, on Thursday he made the first acknowledgement that the Fed was paying closer attention to these fears, yet he still downplayed the risk of inflation on the economy insisting that the Fed has the tools to fight it if it becomes a problem. These comments drove the markets down as a whole, and the commodities and futures sector were no different.

 

The second theme driving prices down today is just the fact that cotton prices, and commodities, have been rising extremely fast and consistently over the past few months, and it may be time for a correction. It is obvious to see that the driving force behind this has been the recovery of the U.S. economy, but prices now are still at there highest in several years, dating to well back before the pandemic. The dual themes pushing prices lower today may continue to be present in the next couple of weeks as investors try to figure out where the Fed will be going with its policy.

 

Another piece of information to be looking out for this week is the February jobs report, which is slated to be released this Friday. If job growth looks solid, or simply does better than expected, this may cause the Fed to become more interested in lowering rates if the economy looks like it is on its way to a full recovery. However, if the report is more sobering, there is no question the Fed will keep rates steady in hopes of reaching maximum employment for the U.S. economy.

 

Finally, another area of the markets textile companies should be paying attention to is the strength of the U.S. dollar. The U.S. dollar index finished at 91.58 on Thursday, up 0.70% on the day.

 

How cotton, other commodities are related to the strength of the U.S. dollar

 

The U.S. dollar index is the most used index to gauge the strength of the U.S. dollar. This is because it weighted against a basket of other foreign currencies, mostly the Euro. This lets investors know how desirable the U.S. dollar is relative to some of the other most desired currencies in the world. Cotton prices, and other commodity prices, are affected by the strength of the U.S. dollar inversely.

 

This is because when the U.S. dollar is very strong, exports become much more expensive, and imports become cheaper, as the purchasing power of foreign entities is reduced. There is a reduction because the value of their respective currency now holds less weight against the U.S. dollar than it did before, meaning they can buy less in the U.S. with the same amount of their own currency they had before.

 

It is the exact opposite if the U.S. dollar weakens, exports become cheaper and imports become more expensive. That is why we saw this reduction in cotton and other commodity prices today because the U.S. dollar moved much stronger, indicating that sending U.S. commodities overseas, such as cotton, will become less desirable and demand for them will drop, therefore lowering prices. On the contrary, if we see the U.S. dollar weaken in coming days, U.S. exports will be cheaper to buy and demand will increase, raising prices.

 

Current state of strength of the U.S. dollar

 

The U.S. dollar index has been consistently falling since the beginning of the pandemic as the Fed has kept interest rates at rock bottom to spur growth in the economy and decrease unemployment. There has been no indication from them in that timeframe that there was any plan to raise rates because of the ongoing economic crisis. However, as we have mentioned, this week was the first signal that rates may be increasing sooner than projected.

 

The Federal Reserve uses lower interest rates to guide economic recovery by increasing spending and investments. This in turn lowers the value of the U.S. dollar because it lowers the yield investments in the U.S. will bring to foreign investors. So, now that the Federal Reserve has hinted that they are paying closer attention to inflation, there is speculation that the U.S. dollar might strengthen in coming months as the Fed may choose to hike rates to fight runaway inflation.

 

Where are cotton prices headed?

 

In total, cotton prices, and other commodities, will continue to be driven upwards by the overall recovery of the United States economy. As discussed earlier however, these upward trends will continue to depend on the rising threats of inflation and its associated effects such as increased rates and a stronger dollar which will both drag prices downward. Our projections continue to show that prices will remain elevated in the next coming months because of upward trend in the U.S. economy.

 

We believe this recovery will outpace any fears of inflation and will continue to cause prices to rise and or be elevated until the recovery of the U.S. economy is complete. These projections were made using exponential smoothing with an alpha value of 0.5 to reflect the fast-paced changes in the market that can happen at a moment’s notice. A higher alpha value allows us to put more weight on more recent data points, therefore causing them to affect our projections more than data points from long ago.

 

Textile companies, or anyone in the commodity market, should keep their eye on the Friday jobs report as this will give key insight into how close the U.S. economy is to being at full recovery.

 

Source: Global Impex

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