Cotton Weakness Continues on Wednesday

Cotton futures are trading lower, with prices down between 35 to 70 points on Wednesday morning after declines on Tuesday; July, October, and December contracts are all experiencing losses. The weekly Crop Progress report showed a one-point drop in good-to-excellent condition ratings, now at 48%, though Texas saw an 8-point increase. The Cotlook A Index decreased by 35 points to 77.80 on June 13, while the USDA's Adjusted World Price rose 26 points to 54.02 cents/lb last Thursday.

Analysis

Cotton futures are experiencing significant downward pressure, with prices declining 35 to 70 points on Wednesday morning, extending losses from Tuesday where contracts fell by 17 to 47 points; for instance, December 25 cotton is currently down 67 points. This bearish sentiment is broadly consistent with a one-point decrease in the national good-to-excellent crop condition ratings, now at 48%. However, this aggregate national figure obscures notable regional improvements, such as an 8-point increase in Texas's crop ratings and substantial positive shifts in conditions in Tennessee (+39), North Carolina (+22), and Mississippi (+11), while the Brugler500 index also rose four points to 328, indicating a smaller proportion of the crop in very poor condition. International price benchmarks present a mixed picture: the Cotlook A Index decreased by 35 points to 77.80 on June 13, while the USDA’s Adjusted World Price (AWP) saw an increase of 26 points to 54.02 cents/lb last Thursday. Contributing to market dynamics are external factors such as a strengthening US dollar index, which rose $0.853 to $98.405, typically exerting downward pressure on dollar-denominated commodities, and a $3.70 per barrel increase in crude oil prices due to heightened geopolitical risk premium concerning potential US involvement in the Iran/Israel conflict. ICE certified cotton stocks remained steady at 62,212 bales as of June 16, suggesting no immediate change in deliverable supply. The market closure for Juneteenth will delay government reports, deferring fresh fundamental inputs.

Key Decisions for Investors

• Investors should closely monitor upcoming weather developments and the subsequently delayed Crop Progress reports for a clearer indication of supply outlook, particularly given the current downward price momentum in cotton futures.
• The divergence between falling national crop quality ratings and significant regional improvements, alongside conflicting movements in the Cotlook A Index versus the USDA's AWP, warrants caution before establishing significant new positions.
• Consider the broader macroeconomic influences, including the appreciating US dollar which may continue to suppress cotton prices, and rising crude oil costs which could impact production expenses and the relative price of synthetic substitutes.