May 2021 cotton futures were volatile throughout the week but rose sharply on
Thursday, March 11. May 2021 cotton futures were at $0.8835, up 3.60% on the day and 1.09% on the week as of 2 PM CST. July 2021 cotton futures were at $0.8920, up 3.59% on the day and 1% on the week as of 2 PM CST. December cotton futures were at $0.8489, up 2.88% on the day and 1.44% on the week as of 2 PM CST. The volatility of the week on the cotton futures market can largely be attributed to the multiple reports the USDA released this week.
The first of these was the supply and demand report released Tuesday, March 9th. This report showed lower production and ending stocks compared with last month's report, meaning no support for the bullish investors who hoped to push cotton prices higher based on a good report. The report showed a 150,000-bale reduction to the 2020 crop, as well as a 100,000-bale reduction to domestic demand projections. Although the American economy is in the beginning steps of roaring back due to increased vaccinations and the arrival of Biden’s $1.9 trillion stimulus package, the report showed signs that the cotton market is still being weighed down by the inevitable effects of the economic shock caused by the onset of the COVID-19 pandemic.
This report caused a 4.2% drop in the May cotton futures on Tuesday, March 9th.
However, the bullish investors in the cotton market got better news on Wednesday and
Thursday. On Wednesday, the Labor Department released its monthly CPI report, detailing how much consumer prices have risen in the last month.
This was a highly anticipated report across the market as inflation concerns because of an overheated economy have been driving down the commodity markets, and markets. The report showed that overall CPI rose 0.4% in the month of February, the same as economists had predicted. In fact, if it weren’t for the highly volatile oil and food prices driving up the CPI, the basis would have only risen 0.1% on the month. This report largely calmed inflation fears and allowed cotton prices to rebound on Wednesday, March 10th, making up about half of the losses experienced the day before.
Finally, the USDA’s Export Sales report for the week ending March 4th was brought to the table on Thursday, giving bullish investors even more fuel to keep prices rising in the futures market. US cotton sales were at 212,000 bales, up 25% from the week before and 5% from the four-week average. This extremely promising report showed that international demand for US cotton is on the rise as the global economy recovers. This allowed for the big price increases that we saw today on the cotton futures markets. As inflation concerns have eased, prices have recovered some of the losses experienced in the past weeks from the highs of late February.
Now, it is up to see whether inflation concerns can continue to be managed as economic activity picks up domestically and around the globe. Because of the promising news this week, cotton bulls can continue to move prices up in the short term and the cotton and textile industry should continue to see elevated prices in the near term. Another useful piece of information the cotton industry was able to see in this week’s USDA Export Sales report was the export sales of competing crops. Competing crops' prices often have a big effect on the prices of those crops that they are competing with.
How Cotton Prices are Affected by Competing Crops’ Prices
Cotton prices are directly affected by competing crops' prices such as corn, soybean,
and wheat. This is because farmers often use the futures market to gauge what crops to plan because those with the highest prices will return farmers the most return on their investment.
Also, because there is only so much arable land for which these cops to be planted on, they
have direct competition in terms of competition over limited resources. When these
competing crops show a good rate of export sales or their prices just in general increase, this can cause the price of change because these positive reports may cause more farmers to plant that competing crop in the upcoming season.
It is often up to investors to wait until reports are released showing how much of each type of crop is planning on being planted in competing land areas before they choose which to invest in. For example, if farmers plant a lot of corn that could have either planted corn, cotton, or something else, this may cause the price of cotton futures to rise as decreased supply is evident.
Additionally, because the US imports much of cotton from overseas, these competing crops’ prices and acres planted overseas must be monitored as well. For example, say a lot more wheat is going to be planted in India than usual. This would mean there will likely be less cotton planted that year in India meaning it will be able to export fewer bales to the US, driving up domestic cotton prices as investors realize more companies will have to source cotton locally instead.
The Current State of Crops that are Competing with Cotton
A good way to look at the current state of crops that are competing with cotton is to
look at the USDA’s Export Sales report that was released today. It showed that corn exports
were at 15.6 million bushels, which was a solid improvement for the week. Wheat exports were at 12.1 million bushels, which was a 50% improvement week over week. These strong reports were important because they may affect farmers’ planting habits in the short term.
With the return of spring, it is time for the planting season to begin and it already has in many southern states. On March 31st, the USDA will release its report on planning intentions for the 2021 season. This is another highly anticipated report as it will most likely affect cotton markets greatly depending on the outcome.
Because of the comeback in prices for other competing crops in the past week and the decreased prices of cotton, there is a chance that less than expected cotton acres may be planted. This would cause a big swing in cotton futures prices as decreased supply would up prices across the cotton futures market. Anyone and everyone in the cotton and textile industry should be keeping their eyes out for that report.
Where are Cotton Prices Headed?
In total, cotton prices, and other commodities, will continue to be driven upwards by
the overall recovery of the U.S. economy. Our projections continue to show that prices will
remain elevated in the next coming months because of this upward trend in the U.S. economy. We believe that because of the recent price drop-off from the highs of late February, along with the planting season being upon us, the cotton markets could see high rates of volatility in the coming weeks. However, our long-term projections remain mostly unchanged. The overall recovery of the U.S. economy will continue to keep prices elevated because of increased demand in the long term, while prices will likely stabilize and drop slightly over this time as the cotton market finds a good price to settle at post-COVID.
Our projections were made using exponential smoothing with an alpha value of 0.5 to reflect the fast-paced changes in the market that can happen at a moment’s notice. A higher alpha value allows us to put more weight on more recent data points, therefore causing them to affect our projections more than data points from long ago.
Nevertheless, textile companies, or anyone in the commodity market, should keep their eye on the March 31st planting intentions report as this will give key insight into the supply of U.S. cotton planted in 2021.