By Jeff Thompson, Autauga Quality Cotton
After working through a healthy correction, the cotton market began the week trading sideways in hopes strong export sales would ignite the next rally. Instead, the world was awakened Thursday to learn Soviet forces had initiated an all-out invasion of Ukraine.
Markets were sent into a tailspin concerned as to what a prolonged conflict and imposed sanctions would do to an already fragile global economy. The Dow declined over nine hundred points by midday before recovering to close up ninety points. Similarly, May cotton futures traded the day in a wide range from high to low of 627 points.
Friday brought more of the same as traders sought safety in fear of what might happen over the weekend. As a result, new crop December futures traded below a $1.00 for the first time since January 28, a span of nineteen trading sessions. As the sun sat on a tumultuous week of trading, both May and December futures lost two and half cents settling at 118.63 and 100.33, respectively.
As this conflict plays out in the days, weeks, and months ahead, what impact will it have on commodities? The grain complex has seen a hike in prices as Ukraine is the fifth largest exporter of wheat and Russia exports 20 percent of the world’s corn.
As for cotton, little direct impact is expected as Russia imports only 125,000 bales annually. In addition, the consumption of cotton at the retail level in Russia is extremely low, less than four million bales. With world consumption estimated at 124 million bales, it’s quite evident this area comprises only a small fraction of the world trade.
However, indirectly, this engagement could seriously threaten cotton by accelerating inflation across the European community and beyond.
The biggest risk to cotton continues to be inflation, or, better yet, the consumer’s response to it. With Russia being the third largest producer of petroleum in the world and a major exporter of natural gas, look for energy prices to further escalate.
Crude oil topped a $100 a barrel for the first time since 2014 with leading experts predicting it will reach $140 before hitting its peak. As a result, prices at the gas pump seem to be changing hourly. Californians last week were paying $6.50 a gallon for unleaded while we are fast approaching $4.00.
Couple this with higher food prices and it’s a given consumer discretionary spending will be limited. However, up to this point, our exports show no sign of weakening demand.
Last week, combined current and new crop export sales exceeded 470,000 bales, up 140 percent from the previous week and 14 percent above the four-week average. Better yet, shipments totaled over 394,000 bales, the best week in over 10 months.
A slow but steady week over week increase in shipments leads us to believe supply chain disruptions may be remedying themselves.
Where to from here? That is a loaded question given the current state of world affairs. Suffice it to say, markets often overreact negatively to such black swan events. Once viewed in a calmer manner, the situation often appears less bleak.
The DJIA gaining over 800 points on Friday is a perfect example. Even so, do not expect a smooth ride as the market will respond to the news of the day. The CFTC report as of 2/22 showed the specs increasing their net long position in corn and soybeans while slightly reducing their long position in cotton, now at 7.4 million bales.
The managed funds aversion to risk and subsequent movement of money will play a key role in the direction prices will trend in the coming weeks. Look for current price levels to provide support as the market continues to trade on world consumption exceeding world production. Looking at fundamentals alone, a return to last week’s new crop pre-invasion high of 104.87 is very doable.
Therefore, it’s too early to hit the panic button. Nonetheless, the window of opportunity is narrowing as world consumption of 124 million bales will be called into question at some point soon.