Pressure is mounting on the ’22 DEC Cotton contract as it falls from historic highs. Will the new trading range provide positive margins for producers?
Dates and Deadlines
7/6/2022 – Online Drought Management Series, Early Weaning and Vaccination Programs, Amarillo
7/27/2022 – Online Drought Management Series, Supplementation Decisions, Amarillo
8/1-3/2022 – Beef Cattle Short Course, College Station
8/19-20/2022 – Texas Sheep & Goat Expo, San Angelo
8/26/2022 – Direct Beef Sales Workshop, Brenham
What We’re Reading
Helping cattle producers manage high input costs, drought – AgriLife Today
Texas Sheep and Goat Expo set for Aug. 19-20 – AgriLife Today
Direct beef sales workshop attracts beef producers from across the state – AgriLife Today
Feedlot inventories at another monthly record high – BEEF
K-State beef cattle experts offer tips for reducing ranch expenses – BEEF
Cotton Market Update
The real reason we’re a bit late on the blog this week is my participation in the Western Agricultural Economic Association Annual meeting. A group of us came together to discuss carbon sequestration and the potential to increase (or lose) profit in that emerging market. However, being late also gave me some leeway to watch this cotton price swing begin to stabilize over the last day or two.
Most technical indicators still suggest a ‘sell’ signal on the DEC ’22 Cotton contract, albeit a weak sell. The question for our purposes is, as always, does the current market yield any potential for profit, assuming you were lucky enough to have cotton emerge on the High Plains this year.
Crop Progress
As of Monday, week 33% of the U.S. cotton crop had squared. That squaring rate is on pace with the 2017-2021 average, and slightly ahead of 2021’s 33%. In Texas, squaring is matching the rate of the 5-year average and last year at 29%. Boll setting at both the state and national level is also on pace with the 5-year average and last year’s rate. The picture is less positive for cotton conditions. Only 17% of the Texas cotton crop is rated ‘Good’, with none of the Texas crop rated ‘Excellent’. Nationally, 37% of the U.S. cotton crop is rated ‘Good’ to ‘Excellent’. This is significantly behind last’s years ratings for the same week, at which time 52% of the crop was rated ‘Good’ to ‘Excellent’ nationally.
Balance Sheet
The net takeaway from the June WASDE was essentially a wash for cotton. Though no supply or demand fundamentals were changed, the forecast for season average farm price was taken from $0.90/pound to $0.95/pound.
Cotton Balance Sheet, June 10, 2022
If there were no major changes to supply or demand, why the sudden contraction in price? The consensus of market commentary seems to be a straightforward answer; the market was overbought and this is a correction, not the other way around. What does that mean for the near-term price? The DEC contract lost a historic amount of ground over the last two weeks, falling from a recent peak of $1.25/pound to as low as $0.92/pound on June 28. The acreage report will be out today, but other than that we are largely in a weather market through harvest. Near term technical indicators suggest support at about $0.91/pound at the bottom of the Bollinger Channel, with the first resistance I see at the 9-day moving average ($1.02/pound). Despite the historic loss in value, these cotton prices still at very profitable levels, again, assuming you were lucky enough to have cotton emergence.
CME Cotton Dec Contract (6/30/2022). Source: CME Group.
