Following the series of “thunders” in U.S. banks, risks in the European banking industry on the other side of the ocean erupted as Credit Suisse Bank fell into trouble. At the same time, although the year-on-year CPI increase in the United States dropped to 6% in February, which was the eighth consecutive month of decline and a new low since September 2021, it is still well above the Federal Reserve’s 2% policy target. Therefore, the “big stick” of the Federal Reserve to raise interest rates in March is still high, and concerns about a global economic recession have once again escalated. On March 15, commodity futures suffered a sell-off, and investors turned to instruments such as the U.S. dollar, gold, and government bonds for safe haven.
In addition to the general decline in other peripheral commodities, the continuous weak decline in contracted exports of US cotton in 2022/23, abundant rainfall in major cotton-producing areas in the United States, significant improvement in soil moisture (except for West Texas), continued tensions in Sino-US relations, etc. Under the negative pressure, the main contract of ICE cotton futures once again fell below 80 cents/pound, which not only triggered a certain amount of ON-CALL price orders to be quickly concluded, but also led to inquiries/purchases from cotton companies in Vietnam, Turkey, China, Bangladesh and other countries. Positivity keeps coming back.
An international cotton merchant said that as the May contract broke through the integer marks such as 80 cents/pound and 79 cents/pound, domestic textile companies and middlemen’s attention and inquiries about cargo/bonded cotton have obviously picked up. Although There is a certain lag in the growth of actual orders, but basis spreads and basis bidding have gradually become the mainstream of market transactions, and the confidence of buyers and sellers is showing a recovery momentum.
As the fluctuation range of ICE’s main contract moves down to 75-80 cents/pound, the author believes that the opportunity for buyers to enter the market at low prices may have arrived. It is not advisable to be overly bearish to avoid shorting the market. The reasons mainly include the following points:
First, the Federal Reserve is expected to slow down its pace of raising interest rates in March, and may choose between raising interest rates by 25 basis points or pressing the “pause button” (the probability of an interest rate cut is low). The impact on the commodity futures market and the stock market has been digested in advance.
Second, global cotton consumption demand is still recovering slowly, especially in Southeast Asia, South Asia and China. The growth of U.S. cotton exports is still worth looking forward to.
Third, the cotton planting area in the United States dropped significantly in March/April, the cotton production in India/Pakistan in 2022/23 is still overestimated, and the cotton planting area in 2023 is expected to become the focus of speculation and increase by long funds.
Fourth, the price ratio of grain and cotton is still at a relatively high level, which provides support to ICE. Taking into account the decline in global grain inventory utilization, it will take time for Ukraine’s grain production to return to the level before the conflict escalated, so global grain prices do not have the basis for a deep correction. It is worth noting that as of now, Ukraine has not agreed to Russia’s proposal to extend the agricultural products export agreement at Black Sea ports for 60 days.