Cotton Market Has Largest Weekly Gain In 12 Years — Is the Bottom In?

The cotton market hit a two-year low on Monday, Oct. 31, but then proceeded to rally in a big way, ending the week 1,494 points, or 21%, higher — the largest weekly gain in 12 years. Is the cotton market finally trying to bottom?  

Cotton prices have dropped sharply the past few months, with December down nearly 50% from contract highs.  The market has been caught in global recession and demand fears, especially in regard to China and their lockdowns and slowing economy. 

Cotton has been the doormat of the commodity complex, according to John Payne, Hedge Point Global Markets.  "Cotton specifically, when we talked 4 months ago, was trading at record highs, and now we’re trading essentially below where we were when COVID started," he says.

The cotton market is so export dependent, he adds, so talk this week that China might ease their zero-tolerance policy on COVID could be the catalyst to finally bottom the market. 

"There’s a lot of moving parts to cotton in the short run, but China opening is one of the big keys to getting the merchandise trade moving once again, as well as a lot of other factors when it comes to inflation," Payne explains.

He says December 2022 cotton looks undervalued with drought-stricken production at a multi-year low of 13.8 million bales. However, new crop contracts for 2023 need a correction or the market risks losing acres to competing crops.   

"You start to look at what is needed for price to incentivize producers in the U.S. to plant cotton on the margins," Payne says. "I think you’re looking at 10¢ up. I would think 80¢ needs to be done with $6 corn."

Payne and other market analysts are hopeful the market is close to bottoming. Darin Newsom, Darin Newsom Analysis, says: "The last time I checked the December/March spread was at an inverse. I think we could see this market rally a bit in the short term, if not the intermediate term, on the strength of fundamentals."

But it might depend on the Nov. 9 WASDE report and what USDA does with demand projections. Cotton exports were stronger the week of Oct. 31 at nearly 122,000 bales, with the majority of the business to China. But traders continue to be concerned about demand amid a strong U.S. dollar to the Yuan, lower crude oil prices and weakness in the stock market.