Cotton futures were largely sideways on Thursday, April 29th, following a week of up and down prices. July 2021 cotton futures finished at $0.8654, down 3.32% on the day and up 0.73% on the week. October 2021 cotton futures finished at $0.8554, down 2.38% on the day and up 0.20% on the week. December cotton futures finished at $0.8384, down 2.70% on the day, and up 0.10% on the week.
Prices were down across the board due to a multitude of factors. First, an extremely disappointing weekly export report from the USDA showed net sales between April 16th and 22nd to be 77,100 RB. It was down 25% from the previous week and 46% from the prior 4-week average. The abysmal report has left doubts in the mind of traders and textile companies about the recovery of global demand for cotton.
Additionally, Turkey, a major importer of American cotton, started its first nationwide lockdown this week in response to rapidly rising COVID-19 cases. These rises in cases could lead to further decreases in international demand.
Another reason for the falling prices seen on Thursday (April 29th) was the forecasted rain in West Texas. West Texas is the United States' largest cotton-producing region, which has been suffering from a severe drought for the past couple of months, leading to projections of a lowered cotton yield for the area. West Texas is forecasted to get 1-2 inches of rain this week. The rain could help alleviate drought conditions. But have certainly enough to break the drought. Therefore, traders were attempting to price in this projected increase to supply for this year's crop.
Increasing COVID-19 cases worldwide have also cast doubt on the pace of the worldwide economic recovery. Although populations in wealthy countries such as the U.S. and European nations are accelerating, vaccinations are still very low. Even nonexistent in the other countries. Unless wealthy countries can start assisting these other countries in their vaccination, efforts towards global recovery will be uneven and slow. Therefore, leading to decreased demand for all kinds of products, including raw materials and commodities.
There are also other ramifications to the world's current vaccination strategy.
How will uneven global vaccination efforts slow the worldwide economic recovery?
First, an uneven global vaccination effort will lead to decreased international demand in the short term. If only wealthy countries can vaccinate within their populations, their respective economies will open. Meanwhile, other countries will be stuck with continuous lockdowns or high spread rates, which will keep their economies crippled in the short term. But for industries in these vaccinated countries that rely heavily on exports or international demand to drive their businesses, they will still be stunted by a partially crippling global economy due to many countries not being out of the pandemic yet.
Many companies' supply chains and an interconnected global economy are also being highly globalized. Manufacturing hubs, such as India, are still crippled and struggling with the pandemic. If global supply chains continue to struggle with these constant shutdowns or reduced production, it will be difficult for companies within these vaccinated countries to recover.
Lastly, by not assisting other nations in their vaccination efforts, wealthy countries are leaving themselves susceptible to variants of COVID-19. These variants could amount from the uncontrolled spread in other countries. COVID-19 is a global crisis. If the globe is not altogether in getting everyone vaccinated, it increases the chances of the virus mutating to something deadlier. It could also result in the lack of effectiveness with our current available vaccines. Therefore, leading to the worst-case scenario in developing new vaccines that would delay economic recovery even further.
With much of the developing world currently under 18 doses administered per 100 people, there is still work needed before the world gets back to normal. For the previous reasons mentioned, it would be in the best interest of the developed world to invest in vaccination efforts. Without it, the global economic recovery cannot be complete until the world has recovered.
Where are cotton prices headed?
Before the price drop on Thursday (April 29th), prices were largely up. These price drops result from good economic data from the broader market and price rise in other related commodities. Drought conditions also continue to persist across much of the West and South in the U.S. Additionally, as the world economy continues to recover, we believe prices have room to improve upwards in the coming weeks. However, traders and textile companies alike should keep an eye out for international COVID-cases and international demand. These factors may keep a ceiling on prices in the short term.
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 July 2021.
Figure 2. The expected future market price of cotton by October 2021.
Figure 3. The expected future market price of cotton by December 2021.