Commodities report

Cotton futures stabilize after months of volatility

Posted March 25, 2021


ST. CLOUD, Minn. – Cotton futures took a dip on Thursday, March 18, after a largely stable week, following months of more volatile than usual trading.


May 2021 cotton futures finished at $0.8545, down 1.17% on the day and 3.16% on the week. July 2021 cotton futures finished at $0.8642, down 1.15% on the day and 4.84% on the week. December cotton futures finished at %0.8259, down 1.24% on the day and 2.49% on the week.


This stabilization and consolidation of prices for this week's cotton market prices come as no surprise because cotton prices have been trading very high for the past few months. But many other negative factors are affecting future cotton prices this week. This weekly report may start sounding like a broken clock, but the message is clear: investors in every corner of the market are spooked by inflation, and the commodities market is no different.


The 10-year Treasury yield reached above 1.7% for the first time since January of 2020 on Thursday, March 18. Despite additional reassurance from the Fed this week, investors still believe inflation is becoming a threat to the U.S. economy and markets. After this week's Fed meeting on monetary policy, Fed chair Jerome Powell reiterated once more that he does not think the rise in inflation will become a significant threat to the economy because it will last for a short-term. Therefore, the Fed will keep rates at rock bottom until at least 2023.


The Fed also revised its forecasts for GDP growth for the U.S. economy in 2021. From their December 2020 forecast, it went up 6.5% from 4.2%. This jump of over 2% plays a factor in inflation fears, coupled with the 10-year Treasury yield rising. Investors fear the economy might recover too quickly and overheat. Therefore, causing inflation and forcing raise rates despite the economy not fully recovered.


At this point, it seems like everyone except the Fed is worried about inflation futures. By dragging down prices, overpriced futures will remain present as the growing season begins across the U.S. Farmers may plant more cotton than expected and drastically increase the supply for 2021, which will cause prices to go down.


In a small blip of good news this week, a USDA report shows that exports remain mostly unchanged from previous reports at 351,900 bales. With the combined worries of inflation and consistently overpriced cotton futures markets over the past few months, international demand was not enough to stop prices from falling. They will likely continue to decrease into the next coming weeks as they try to find a consolidated price. Investors in the cotton market and textile companies should keep their eye on the 10-year Treasury yield this coming week. It will give a better idea of whether prices will be stabilizing and consolidating sooner rather than later.


One factor in cotton prices that have not been around in the news this week is the weather. Weather is an important factor as the growing season begins across much of the U.S. this month.


How are cotton prices affected by the weather?


Cotton and crop commodity prices are massively affected by weather each year. One reason why cotton futures prices pushed so high in early 2021 was low cotton output expectations. Cotton prices are inversely related to weather in that when there is good weather for growing cotton, then the price tends to drop. When there is bad weather for growing cotton, then the price increases. This is simple supply and demand because poor output caused by poor weather will result in a shrinkage in domestic supply.


What is the current state of the weather and growing conditions in the U.S. cotton country?


As cotton is mostly planted in the southern half of the U.S., such as Texas, we only need to really pay attention to growing conditions in these areas. One good place to go for weather and U.S. growing conditions outlook is referencing the U.S. Drought Monitor. This report is released by The National Drought Mitigation Center at the University of Nebraska every Thursday. The U.S. Drought Monitor classifies drought conditions in five separate tiers: abnormally dry, moderate drought, severe drought, extreme drought, and exceptional drought. Although all these conditions can affect crop output, it is obvious that the more drastic the drought, then the lower the expected output of crops, such as cotton.


Looking at the U.S. Drought Monitor released Thursday, March 18, we can see that much of Texas and portions of the Southeastern United States, such as Alabama and Mississippi, are currently in some form of a drought. With much of Texas, especially in the western and southern parts, in some form of drought moderate or higher, there is reason to believe that cotton output for 2021 may be lower than usual. These drought conditions are present even after more than an inch of rain fell across western Texas in the past week, which slightly improved conditions.


The western U.S. is also still in the midst of a multi-year drought with moderate drought to higher conditions extending from California to the High Plains. This will affect cotton output across California, Arizona, and New Mexico heavily as well. It is also important to look at rain forecasts from the National Weather Service to get a better idea of where forecasters think precipitation will fall in the coming days. Anything farther out than that has a high degree of unpredictability.


Looking at the National Weather Service's weekend precipitation forecast for this week, we can see no precipitation forecasted for any parts of Texas. There are only some rain forecasts for other parts of the southeastern U.S. With no evidence in the short-term, drought conditions will markedly improve. But cotton traders and textile companies need to keep an eye on future drought conditions because they provide key insight into factors that directly affect the price of cotton futures.


Where are cotton prices headed?


Cotton prices are finally starting to come down and stabilize. In total, it appears that cotton prices have reached a ceiling after months of bullish trading. It is now up to the Fed to calm inflation fears and to international exports to remain strong in preventing cotton futures from falling too much in the short-term. Once again, we recommend keeping an eye out for the March 31st planting intentions report. This report will give key insights into the supply of U.S. cotton planted in 2021.


Additionally, this week may have been an anomaly for the cotton futures markets as inflation fears can cause prices to be extremely volatile. Also, watch out for increasing volatility in the cotton and commodities markets in the coming weeks. This week, the Chicago Board of Trade allowed an expansion of speculative position limits for agricultural futures. Heavier speculation is never good for market volatility. Due to this, the commodities market might be getting a little wilder soon.


Our projections for cotton futures prices 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.


Source: Global Impex

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