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Weekly commodities report: Global Impex USA’s cotton price analysis and expectations for 4/22

Cotton futures were largely sideways on Thursday, April 22nd, following a week of up and down prices. May 2021 cotton futures finished at $0.8464, down 0.35% on the day and 0.42% on the week. July 2021 cotton futures finished at $0.8605, down 0.36% on the day and 0.28% on the week. December cotton futures finished at $0.8375, down 0.02% on the day, and up 60% on the week.

Prices would have most likely dropped even further on Thursday had the market sentiment in agricultural commodities not been so high due to the record high contracts on corn, wheat, and soybeans. As was seen in the early morning trading for today's session, cotton bulls attempted to chase the highs of these other commodities. But their efforts were turning south as the day went on. The effect of another poor weekly export sales report further soured sentiment.

This week's export sales report from the USDA, valid for the periods between April 9th to April 15th, showed another poor showing for U.S. cotton. Net sales were only 103,100 RB for the week, down 16% from the week prior and 44% from the prior 4-week average. Even though outside market factors, such as similar commodities' prices going up and persistent drought conditions in West Texas, all pointed towards an up day in the cotton futures market, a poor showing for international demand will always inevitably pull prices back down.

Speaking of West Texas, drought conditions continue to persist and worsen as the hot and dry weather continues to be the norm. The weekly U.S. Drought Monitor released today (April 22nd) showed that severe to exceptional drought conditions are still present in West Texas, the nation's largest cotton producer. Additionally, hot and dry weather conditions are predicted to continue for the next 6 to 10 days in the area. Considering that planting season for cotton should be in full swing in the next week or two, this is especially concerning for many farmers who may have to abandon or expect seriously reduced yields from this year's cotton crop. If these drought conditions continue to persist in West Texas, we can expect prices to be supported upwards. Or at least hold back any major drops in price.

Meanwhile, another event that could be supporting U.S. prices upwards this year is the concerning cotton industry developments out of Pakistan and India.

How could U.S. cotton futures be affected by the events in Pakistan and India?

Two dual issues affecting Pakistan and India could help drive up prices again in the U.S, both in the near term and short-term. First, Pakistan is currently the world's 5th largest cotton producer. But that may soon be coming to an end. Years of bad weather, pest outbreaks, and better margins on other crops have hurt Pakistan's cotton supply in both quality and quantity. Therefore, this is good for U.S. cotton prices because Pakistan is forced to import much more cotton this year than usual to feed its mills and keep its citizens employed.

The U.S. is Pakistan's cotton main importer as ties with its cotton-producing neighbor India have never been good. Pakistan imports 39% of its total cotton imports from the U.S. In a year in which cotton production has been poor, Pakistan’s cotton supply is dwindling. The U.S. is the most likely country to take over importing more cotton. Therefore, increasing international demand and driving prices higher. While it is still unclear if the government will allow imports from India this year, this only solidifies the U.S.'s position to import more cotton from Pakistan.

Second, India is dealing with a different crisis that is affecting its cotton industry. Within the past few weeks, India has reported staggering daily COVID-19 cases. In fact, on Thursday (April 22nd), India reported 313,310 cases of COVID-19 in a day, which is a world record. Reports from across India state that hospitals are full-capacity, and conditions are worsening. Maharashtra, India's cotton hub state, also went into a lockdown on Wednesday (April 21st) to curb the spread of the virus.

With people getting sick and cotton mills shutting their doors for presumably the next couple of weeks, the world's largest cotton exporter is being shut down. As a result, the U.S. positions itself to make up this deficit by being another source of cotton for the world. If cases continue to soar in India, their cotton prices will likely soar again. Therefore, making U.S. cotton more appealing price-wise.

Both of these events taking place in Pakistan and India have a positive effect on U.S. cotton prices. If these issues persist, they could also help raise international demand for U.S. cotton in both the near and long-term future.

Where are cotton prices headed?

For the past couple of days, prices have been trending sideways. Contributing to this trend are multiple weeks of poor export data. These data are fighting against drought conditions in West Texas to see which can push prices. Additionally, export data may continue to be poor as rising international COVID-19 cases are once again threatening to slow down the worldwide economic recovery.

It is unclear which way prices will go for now. But we recommend keeping an eye on the international COVID-19 case numbers and drought conditions in West and South Texas to get the best indicators of where prices might be heading next.

As always, our projections for cotton futures prices 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.

Figure 1. The expected future market price of cotton by May 2021.

Figure 2. The expected future market price of cotton by July 2021.

Figure 3. The expected future market price of cotton by December 2021.


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