Commodities report

Cotton futures continue to fall due to numerous global issues

Posted March 31, 2021


ST. CLOUD, Minn. – Cotton futures fell sharply on Thursday, March 25th, after a week that had cotton futures slowly falling over the past few days.

May 2021 cotton futures finished at $0.7844, down 4.85% on the day and 8.26% on the week. July 2021 cotton futures finished at $0.7952, down 4.79% on the day and 8.07% on the week. December cotton futures finished at $0.7655, down 4.75% on the day and 9.18% on the week.


Once again, a stronger dollar caused by increasing inflation fears drove prices down this week. The 10-year Treasury yield finished up 0.019 points today to 1.633%. This current level is not as elevated as the highs of recent weeks that had the 10-year Treasury yield at 1.73%, as high as pre-pandemic levels. Still, this current yield represents a large increase relative to recent weeks as it shows that although inflation fears may have leveled off in recent days due to assurance from the Federal Reserve, these fears are still being raised across the market.


Additionally, a resurgence of COVID-19 cases and subsequent lockdowns abroad, especially in Europe, has lowered expectations of foreign demand for U.S.-based cotton. In fact, the weekly USDA export sales report released this morning (for the week ending March 18th) highlighted that net cotton exports were down 38% week over week with total net cotton exports amounting to 271,200 bales.


The threat of elevated domestic inflation levels coupled with decreasing foreign demand when the world economy is supposed to be heating up has made it all but impossible for bullish cotton investors to drive prices upwards. If this new wave of COVID-19 in Europe and elsewhere is not stymied by increasing vaccination numbers, the global recovery could be in for another setback.


This would of course drop cotton prices even further as cotton mills around the world were just beginning to increase supply to prepare for the forecasted global recovery. This latest wave of COVID-19 is not expected to halt recovery completely though, it is more likely to simply slow the rate of recovery and expand its timeline.


If cotton bulls have any hope left, it may all be riding on a mishap that recently happened in the Suez Canal. This latest transportation crisis coupled with the ongoing crisis associated with COVID-19 and the global container shortage has once again exacerbated supply issues for commodities and supply chain issues for companies around the world.


How are cotton prices and other commodities being affected by the global shipping crisis?


There are three main reasons that the world is currently experiencing a global shipping and transportation crisis. First, since the start of the pandemic, COVID-19 has forced companies to rethink their supply chains as disruptions caused by the pandemic have continued to cause transportation costs to rise. Additionally, a global container shortage caused by trade imbalances between Asia and the West has also caused transportation costs to skyrocket. Finally, the Suez Canal crisis is causing an immediate and very visible disruption to supply chains around the world.


The movement of ships through the Suez Canal accounts for about 12% of global trade. Because one super-massive container ship, the Ever Given, found itself wedged between the walls of one of the world’s most important trade arteries, an estimated $400 million in global trade goods were delayed every hour. This complete blockage of the Suez Canal in both directions caused ships carrying everything from oil to home goods to reroute around the southern tip of Africa, adding an estimated seven to nine days in total shipping time for these vessels.


To understand the true scale of this ongoing crisis it must be mentioned that global shipping costs are currently the highest they have ever been. The Platts Container Index, a weighted average of the spot freight cost on key container trade routes, was last assessed at $4,495.59/FEU, more than 3.5 times higher than a year earlier. Increased demand because of the global economic recovery is further pushing prices higher as more and more goods need to be shipped across the world.


The Suez Canal blockage itself is not likely to affect commodity prices directly, though. Across the world increasing shipping delays have caused pandemonium, including at U.S. ports where vessels are waiting multiple days before being able to even unload their containers.


Although the Suez Canal crisis and the larger global shipping crisis may not be bad enough now to fight back against falling commodity prices, due to a perceived drop in international demand in the short-term, cotton investors and companies should keep an eye on the aftereffects of Suez Canal crisis and other shipping news. This crisis directly affected shipment times and costs and continued to put pressure on commodity prices in an upward direction and increased commodity price volatility.


Where are cotton prices headed?


In total, it seems as though now that there is no floor for cotton prices as they continue to fall. However, it is likely that as this new wave of COVID eventually calms down due to an increased pace of vaccinations abroad, prices may rebound down the road as investors work off this shock. It must be considered that since May 2021 cotton futures are now down YTD, the period of overpriced cotton experienced early in the year is most likely over.


Textile companies and cotton investors alike should continue to monitor the ongoing global shipping crisis as this situation is directly affecting shipping costs and the price of cotton and other commodities as well. Additionally, as previously mentioned, investors and companies should also monitor the increase in COVID-19 cases abroad as new variants threaten to slow down the global economy and further drop commodity prices as demand drops. All these factors are contributing to an increasingly volatile commodities market and because none of these issues are going to be solved in the coming days, investors and companies should expect volatile conditions to continue.


On another note, we also recommend keeping an eye out for the next planting intentions report, as this will give key insight into the supply of U.S. cotton planted in 2021. It will be interesting to see whether the latest drop in prices will drastically decrease the expected acres planted for the 2021 season.


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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