Global Impex USA releases cotton analysis, expectations
Posted March 16, 2021
ST. CLOUD, Minn. – May 2021 cotton futures were volatile throughout the week but rose sharply on Thursday, March 11. The 2021 cotton futures prices and percentages for May, July and December on the day and week of March 11 at 2 p.m. CST are represented on the table above. The volatility on the cotton futures market attributes to the multiple reports the USDA released last week.
The first of these was the supply and demand report released Tuesday, March 9. As there was no support for the bullish investors, who hoped to push cotton prices higher, this report showed lower production and ending stocks than last month. Instead, it showed a 150,000-bale reduction to the 2020 crop and a 100,000-bale reduction to domestic demand projections.
The American economy is roaring back because of vaccination increases and the arrival of Biden's $1.9 trillion stimulus package. Still, the cotton market is being weighed down by the economic shock caused by the COVID-19 pandemic. This report caused a 4.2% drop in the May cotton futures on Tuesday, March 9. However, the bullish investors in the cotton market got better news on Wednesday and Thursday.
On Wednesday, the Labor Department released its monthly CPI report, which details how much consumer prices have risen since last month. The report was highly anticipated across the market because of inflation concerns and an overheated economy driving down the commodity markets. Furthermore, it showed that overall CPI rose 0.4% in February, which economists had predicted. If it weren't for the highly volatile oil and food prices driving up the CPI, the basis would have only risen 0.1%. This report calmed inflation fears and allowed cotton prices to rebound on Wednesday, March 10. The rebound made up about half of the losses experienced the day before.
USDA's Export Sales report for the week, ending on March 4, was brought to the table on Thursday. It gave bullish investors even more fuel to keep prices rising in the futures market. U.S. cotton sales were at 212,000 bales. These sales were up 25% from the week before and up 5% from the four-week average. The report showed that international demand for U.S. cotton is on the rise as the global economy recovers. Therefore, allowing for the pricing increases that we saw today on the cotton futures markets.
As inflation concerns have eased, prices are recovering from some of the losses experienced since late February. Now, it is up to see whether inflation concerns can continue to (be managed) as economic activity picks up domestically and around the globe. With the promising news this week, cotton bulls can continue to move prices up in the short term. The cotton and textile industry should continue to see elevated prices in the near term.
Another useful piece of information the cotton industry was able to see in this week's USDA Export Sales report was the export sales of competing crops. Competing crop prices can cause a huge effect on another. But how are cotton prices and competing crop prices related?
How are cotton prices affected by competing crops’ prices?
Cotton prices are directly affected by competing crop prices such as corn, soybean, and wheat. This is because farmers often use the futures market to gauge what crops to plant. The crops with the highest prices will return farmers the most return on their investment. Additionally, there is only so much arable land that they can plant crops on. Therefore, they have direct competition in terms of limited resources.
When these competing crops show a good rate of export sales, it results in a price change. Positive reports may cause more farmers to plan that competing crop in the upcoming season. It is often up to investors to wait until released reports show how much each type of crop will be planted in competing land areas. For example, if farmers plan a lot of corn that could have planted corn, cotton, or other crop types, this may cause a rise in cotton futures because of decreased supply.
Furthermore, as the U.S. imports cotton from overseas, these competing crops' prices and acres planted there must be monitored as well. For instance, say a lot more wheat is going to be planted in India than usual. This would mean it is less likely that they will plant cotton in India that year. Therefore, they can export fewer bales to the U.S. Domestic cotton prices will drive up because investors will realize more companies will have to source cotton locally instead.
What is the current state of crops competing with cotton?
One way to look at the current state of crops competing with cotton is from today's USDA's Export Sales report. It shows that corn exports were at 15.6 million bushels. This was a solid improvement for the week. Meanwhile, wheat exports improved 50% week over week at 12.1 million bushels. These reports are important because they may affect farmers' planting habits in the short-term. With spring returning, it is the time for planting season to begin, which it already has in many southern states.
On March 31, the USDA will release its report on planting intentions for the 2021 season. Many are anticipating this report because it will most likely affect cotton markets, depending on the outcome. With the combination of competing crops' prices making a comeback and decreasing cotton prices, there is a chance that fewer cotton acres will be planted than expected. This would cause a huge swing in cotton futures prices as decreasing supplies would increase prices across the cotton futures market. Anyone and everyone in the cotton and textile industry should be keeping their eyes out for that report.
Where are cotton prices headed?
In total, cotton prices and other commodities will continue to be driven upwards by the overall recovery of the U.S. economy. Our projections continue to show that prices will remain elevated in the next coming months because of this upward trend in the U.S. economy. We believe that in combination with February's recent price drop-off and upcoming planting season, the cotton markets could see high rates of volatility in the coming weeks. However, our long-term projections remain mostly unchanged. The recovery of the U.S. economy will continue to keep prices elevated because of increased demand in the long-term. Prices will likely stabilize and drop slightly over this time as the cotton market finds pricing to settle on post-COVID.
We made our projections using exponential smoothening with an alpha value of 0.5. This alpha value reflects 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 and the commodity market should keep their eye on the planting intentions report for March 31. This will give key insight into the supply of U.S. cotton planted in 2021.
Source: Global Impex