Cotton Price Decline part of Complicated Economics

BY JOHN MILLER

The cotton market has lost a quarter of its value since summer. The Cotton Futures Versus US Dollar chart illustrates the abrupt drop in 2022 futures when in August traded $1.18 per pound for only the 3rd year since the 1950’s! Given the short crop, this decline is difficult to grasp. The NWS Drought Monitor is a backdrop for the US crop as the cotton belt has been in the grip of an historic drought with little reprieve. USDA lowered harvested acres considerably at summers end, but as the ICE Cotton Prices chart shows, futures have fallen from the upper 10 percent of the 5-year range to barely over average. Looking at December futures, its hard to miss the correlation between cotton and the Dollar. The dollar is at 20-year highs, trading at approximately 114 and making US cotton more expensive to foreign buyers.

December 22 Cotton Futures vs. US Dollar

From the USDA Cotton Planted versus Cotton Harvested chart for the past two decades, US farmers are expected to harvest only 40 percent of the crop. On those mere 8 million acres, production would fall to the multi-year low of 13.8 million bales. With supply dropping so sharply, it’s hard to understand how prices have fallen so quickly during harvest. The US Cotton Total Use chart tells

some of the story by showing that exports have been in decline since 2017. Increased world growths, short crops, competing fibers, and Covid measures have all played a part. That same chart shows the large single year drop from 2021 to 2022. With this, we start to understand what’s happened as traders are fearful of long-term demand prospects. But let’s preface the remainder of this discussion by saying that prices could turn around with reversals in economic fortunes given the short nature of the US and world crops.

We can’t talk about prices without discussing inflation, the FEDs efforts to fight it with interest rates hikes, and unwanted effects of an increasing dollar and recession. Two weeks ago the US Central Bank raised federal funds rates by 0.75 percent resulting in asset liquidation due to recession fears. The knee-jerk was higher short-term rates and lower long-term. The Central Bank will likely raise rates by a combined 1 percent before year end resulting in a higher dollar as investors seek a safety. In the Stone X Major Commodity Index one can understand why the fear of inflation and willingness to risk recession. This chart shows how inflation among agricultural, energy and metals have topped 22 year levels. And we need to be prepared for more! The FED “anticipates that ongoing increases in the target range will be appropriate”. Forecasts point to a 4.5 percent rate by year end and 5 percent next year. The US Treasury Yield chart shows Short-Term Treasury rates exceeding 4 percent. In uncertain times investors want to avoid long-term rate risk by using short-term. The two FOMC meetings left this year leaves one 75 basis-point hike followed by a 50 basis-point hike in the last. Of note, the next meeting on November 2nd, a week before the midterm elections.

The FED is clear that “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy”, and “In light of the high inflation we’re seeing, we think that we’ll need to bring our funds rate to a restrictive level and to keep it there for some time”. Chairman Powell says “Over coming months we’ll be looking for compelling evidence that inflation is moving down” and “At some point it will become appropriate to slow the pace of rate hikes” but “We will keep at it until the job is done”. “Higher interest rates, slower growth, and higher unemployment are all painful for the public. But not as painful as not bringing down inflation”. “We want to act aggressively now” and “keep acting until the job is done” The Fed isn’t alone (Europe is following along) and it’s no surprise to see updated economic forecasts showing a higher risk of a recession in coming years. Given the importance of cotton the Valley, we have to hope that favorable growing conditions, input price relief and a realization by the marketplace that 2023 will need a boost in cotton supplies.