24.06.2022 – Away from the din of Wall Street, a major event is underway in the agricultural market. The price of cotton is plummeting. The slump in consumption in the wake of rising global inflation is hitting cotton farmers and mills hard. The looming recession is outweighing the threat of supply shortages from poor harvests.
As it stands, the bull market that has been underway since the spring of 2020 has just been broken. In the Corona crisis, a pound of cotton was going for around 51 cents in March 2020 – this spring we had reached just over 155. In the meantime, we are below 100. However, the bears have to worry about the price gaps that have been torn in the meantime, which you can see in the daily chart. These gaps, opened in the rapid sell-off, will be closed at some point – only when?
The deflationary Corona crisis had initially caused prices to crash. Then all the global aid programs kicked in and demand rose. Now the cycle has apparently been turned again: Inflation is raging, a new recession is looming worldwide, the Federal Reserve is raising interest rates, and Europe will follow. Anyone who is afraid of losing their job and whose household budget is being eaten up by inflation, or who has financed their house with a flexible mortgage and has to shoulder rising interest rates, will save – and buy less clothing, home textiles or furniture.
Impending recession and buyers’ strike
The fate of cotton prices is in the hands of consumers, according to analyst Jeff Thompson of the Autauga Quality Cotton Association, a U.S. marketing association. He judged that the destruction of demand will probably outweigh the losses in production, more on this below. He added that consumption would be hit by rising prices, higher interest rates and the crash in asset values. As a result, he said, consumer sentiment in the U.S. currently stands at 50.2 points, down from 58.4 points the month before – and 85.5 a year ago. Already, he sees a slight oversupply, with the global mill processing rate estimated at 121.5 million bales. However, 121.7 million bales are coming from the fields. And, “It is easy to surmise a significant decline in mill use is very probable given the ominous shadow world economies are casting around the globe.”
Sanctions against China
However, there are certainly bullish arguments for cotton. For example, the Uyghur Forced Labor Prevention Act (UFLPA) went into effect in the U.S. earlier this week, as reported by the Guardian. This law bans the import of cotton from the Xinjang region in northwest China because of the oppression of the Uyghurs. About one-fifth of the cotton on the world market comes from the Middle Kingdom – and 84 percent of it again comes from Xinjiang. Presumably, the goods are purchased somewhere else. However, America is the price-determining market, and here U.S. farmers now have no Chinese competition.
Drought threat
The U.S. lobby group Cotton Incorporated also referred to the drought in the U.S. and other countries: “Too, both China and India are facing a combination of heat and some drought problems. Further, the worlds five largest cotton producing countries are all facing some level of uncertainty about a drought/heat reduced cotton crop.” We add: It is certainly not entirely altruistic for a producer association to see production losses and, as a consequence, rising prices. Nevertheless, it can be right.
Our conclusion: the determining factor for the cotton price is the threat of recession. It is no wonder that the crash in the cotton price coincides with the turnaround in interest rates and the Federal Reserve’s admission that a soft landing – that is, a return to normalcy without a crisis – would be a major challenge. However, massive crop failures could swing the pendulum back. The same goes for a change in sentiment in the global financial market – already some analysts are hoping for an end to interest rate hikes and even for a new quantitative easing, i.e. a renewed flood of money. So you should keep an eye on the real-time news. Bernstein Bank wishes you successful trades and investments!
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