Cotton Falling Back Lower on Wednesday Morning Trade

Cotton futures are trading lower, with losses ranging from 32 to 66 points on Wednesday morning, following a weaker close on Tuesday. The decline comes as the latest NASS Crop Progress report indicates planting is behind the average pace, with 52% of the crop planted versus a 56% average, and squaring also lagging. The Cotlook A Index and USDA's Adjusted World Price have also decreased, while ICE cotton stocks remain steady.

Analysis

Cotton futures are experiencing significant downward pressure, with Wednesday morning losses extending from 32 to 66 points across various contracts, building on Tuesday's declines where contracts fell by 31 to 54 points. For instance, the July 25 contract, after closing down 54 points at 65.57 cents/lb on Tuesday, was reported to be down an additional 59 points in Wednesday morning trading. This bearish sentiment is underpinned by fundamental indicators, including the NASS Crop Progress report as of May 25, which revealed that only 52% of the cotton crop was planted, lagging the five-year average of 56%, and crop development was also behind schedule with only 3% squared compared to the 4% average. Further contributing to the negative outlook, the Cotlook A Index decreased by 50 points on Friday to 78.25, and the USDA’s Adjusted World Price (AWP) fell 38 points on Thursday to 53.52 cents/lb. While ICE certified cotton stocks remained steady at 42,240 bales as of May 23, this stability has not offset the prevailing bearish factors. The broader market environment, with crude oil prices declining by 40 cents and the US dollar index strengthening by $0.500 to $99.510, may also be contributing to the downward pressure on cotton prices.

Key Decisions for Investors

• Given the consistent price declines and bearish fundamental signals such as lagging crop progress and falling global cotton indices, investors should exercise caution with existing long positions and consider adopting a defensive stance.
• Investors should closely monitor upcoming NASS Crop Progress reports, as continued delays in planting and development, while currently reflected in bearish market sentiment, could eventually lead to supply tightness if the situation does not improve.
• It is prudent to factor in the potential for continued headwinds from a strengthening US dollar and weaker crude oil prices, which are typically bearish for dollar-denominated commodities like cotton.