Cotton futures rose sharply on Thursday, April 8th, following a week of steadily rising
prices following an intense sell-off in weeks prior. May 2021 cotton futures finished at $0.8141, up 2.69% on the day and 4.88% on the week. July 2021 cotton futures finished at $0.8266, up 2.56% on the day and 4.75% on the week. December cotton futures finished at $0.8112, up1.51% on the day, and up 4.47% on the week.
The main driver of the rising prices seen on Thursday was the extremely strong export sales report released by the USDA on the same day. The USDA Export Sales Report, representing the week ending April 1, 2021, showed net sales at 269,900 RB for the week. This was noticeably up from the week prior which showed an abysmal 78,400 RB sold. The most recent export sales report showed net sales were up 8 percent from the prior 4-week average.
Another factor contributing to the strong rise in prices this week was the excellent jobs report released on the Friday before Easter. The March jobs report showed an increase of 916,000 non-farm jobs on payrolls, while unemployment dropped to just 6% — this was well above economists’ expectations for the report. The March jobs report, along with a generally oversold condition on the cotton futures markets following the big selloffs of the week prior, gave enough gas to bull-traders up drive-up prices this week.
Additionally, drought conditions across much of the US West and Texas, have not improved
from their already dire situation of the past couple of months. Extreme and exceptional drought
conditions are persisting across West Texas and California’s Central Valley where large amounts of domestic cotton are produced. This is leading cotton traders to believe that this year’s domestic cotton production and acres planted may be under the estimated amounts because of lower yields and unfavorable planting conditions, respectively. There is no rain forecasted in West Texas or the Central Valley of California for the next five days, so these conditions are expected to persist.
How are Drought Conditions Expected to Trend in Coming Weeks?
As discussed in prior issues of this publication, a multi-year drought has been
persisting across the US West for many years now. These drought conditions are continuing this year and are becoming even more severe as the rainy season in the US West comes to an end. In California, where cotton is grown across the Central Valley, an April 1st snow survey showed that snow water content in the Sierra Nevada Mountains was at 59% of the average at this time of the year, and the state received about 50% of its average precipitation for the water year.
This spells bad news for the rest of the year when rainfall is much less common for this part of
the country, so it will only be harder to make up the water deficits they are already
experiencing. In West Texas, the largest cotton-producing area in the country, worsening
drought conditions continued this week as no rainfall and higher than average temperatures
combined to worsen growing conditions across much of the state. Cotton crop is usually
planted in West Texas between mid-May and mid-June so if conditions do not improve before then, we can expect serious decreases to the expected yields of this year’s cotton crop.
The other portions of the US that grow large amounts of cotton are across various regions of the South which are not currently affected by drought. When looking forward to the drought
expectations for the future, we can look at the Climate Prediction Center’s U.S. Seasonal
Drought Outlook from the National Weather Service. The latest report released on March 18th (valid for the period March 18th to June 30th) shows that drought conditions are expected to
persist across all regions of the US West where cotton is grown. These persistent drought
conditions are likely to drive cotton futures prices higher soon as expected
domestic production will continue to fall.
Where are Cotton Prices Headed?
In the short term, we can expect cotton prices to continue to rise as improving
economic conditions and worsening drought conditions continue to pull demand and supply in
directions that cotton bulls see as favorable. The market has now pushed past its previously
overbought condition and found itself in an oversold condition that it has been trying to pull
out of over the course of the week.
Our projections show that we expect cotton prices to settle somewhere slightly above the 80-cent mark for May and July cotton while December cotton could see prices even higher. Traders and textile companies alike are looking forward to the April supply/demand report, slated for release on Friday, April 9th, which will give updated expectations for both. Additionally, we recommend keeping an eye out for the April 15th drought expectations report from the Climate Prediction Center which will detail where the drought conditions the US has been experiencing are expected to head.
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.
