Weekly cotton futures rise sharply after strong export, jobs reports
Posted April 13, 2021
ST. CLOUD, Minn. – Cotton futures rose sharply on Thursday, April 8th, following a week of rising prices after an intense sell-off weeks prior, according to Global Impex USA’s latest commodities report.
May 2021 cotton futures finished $0.8141, up 2.69% on the day and 4.88% on the week. July 2021 cotton futures finished at $0.8266, up 2.56% on the day and 4.75% on the week. December cotton futures finished at $0.8112, up 1.51% on the day and up 4.47% on the week.
The main driver of the rising prices seen on April 8th was the extremely strong export sales report released by the USDA on the same day. The USDA Export Sales Report, representing the week ending April 1, 2021, showed net sales at 269,900 RB for the week. This was noticeably up from the week prior which showed an abysmal 78,400 RB sold. The most recent export sales report showed net sales were up 8 percent from the prior four-week average.
Another factor contributing to the strong rise in prices this week was the excellent jobs report released on the Friday before Easter. The March jobs report showed an increase of 916,000 non-farm jobs on payrolls, while unemployment dropped to just 6% — this was well above economists’ expectations for the report. The March jobs report, along with a generally oversold condition on the cotton futures markets following the big selloffs of the week prior, gave enough gas to bull-traders up drive-up prices this week.
Additionally, drought conditions across much of the U.S. West and Texas, have not improved from their already dire situation of the past couple of months. Extreme and exceptional drought conditions are persisting across West Texas and California’s Central Valley where large amounts of domestic cotton are produced. This is leading cotton traders to believe that this year’s domestic cotton production and acres planted may be under the estimated amounts because of lower yields and unfavorable planting conditions, respectively. There is no rain forecasted in West Texas or the Central Valley of California for the next five days, so these conditions are expected to persist.
How are drought conditions expected to trend in the coming weeks?
As discussed in prior issues of this publication, a multi-year drought has been persisting across the U.S. West for many years now. These drought conditions are continuing this year and are becoming even more severe as the rainy season in the U.S. West comes to an end. In California, where cotton is grown across the Central Valley, an April 1st snow survey showed that snow water content in the Sierra Nevada Mountains was at 59% of the average at this time of the year, and the state received about 50% of its average precipitation for the water year.
This spells bad news for the rest of the year when rainfall is much less common for this part of the country, so it will only be harder to make up the water deficits they are already experiencing. In West Texas, the largest cotton-producing area in the country, worsening drought conditions continued this week as no rainfall and higher than average temperatures combined to worsen growing conditions across much of the state. Cotton crop is usually planted in West Texas between mid-May and mid-June so if conditions do not improve before then, we can expect serious decreases to the expected yields of this year’s cotton crop.
The other portions of the U.S. that grow large amounts of cotton are across various regions of the South which are not currently affected by drought. When looking forward to the drought expectations for the future, we can look at the Climate Prediction Center’s U.S. Seasonal Drought Outlook from the National Weather Service. The latest report released on March 18th (valid for the period March 18th to June 30th) shows that drought conditions are expected to persist across all regions of the U.S. West where cotton is grown. These persistent drought conditions are likely to drive cotton futures prices higher soon as expected domestic production will continue to fall.
Where are cotton prices headed?
In the short term, we can expect cotton prices to continue to rise. While economic conditions improve, drought conditions worsen. Therefore, continuing to pull demand and supply in directions that cotton bulls see as favorable. As the market has now pushed past its previously overbought condition, it has found itself in an oversold condition. This oversold condition has been trying to pull out over the week.
Our projections show that we expect cotton prices to settle somewhere slightly above the 80-cent market for May and July cotton. Meanwhile, prices could be even higher for December cotton. Traders and textile companies are looking forward to the April supply and demand report, which will give updated expectations. Additionally, we recommend keeping an eye out for the April 15th report on drought expectations from the Climate Prediction Center. The report will detail where the persistent drought conditions the U.S. is expected to head.
As always, 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 USA