Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Cotton Is Surging While the Broader Commodity Index Stalls
Transcript
- Lucas: Cotton is having a moment — and it's not just a little blip. Futures jumped more than 6 percent in the last five sessions, pushing the front-month contract to about 79 and a half cents a pound. That's the highest we've seen since early March. Luna: And this is happening while crude is down 2.5 percent, gold is off almost 3 percent, and silver got absolutely hammered — down more than 6 percent. What's cotton got that they don't? Lucas: A very specific supply story — and a demand surprise that caught the market off guard. Let's start with supply. The key growing region in the US is West Texas, the high plains around Lubbock. That area had a dry winter and a dry spring. Irrigation water is tight. The latest crop condition reports show a significant portion of the crop in poor to very poor condition. Luna: Right, the USDA's weekly report a few days ago had Texas cotton condition ratings well below the five-year average. I remember seeing something like 38 percent poor to very poor. Lucas: Exactly. That's the kind of number that gets traders nervous because Texas accounts for roughly 40 percent of US cotton production. But the supply story alone wouldn't explain a 6 percent rally in a week. You need the demand side to cooperate — and it did. Chinese textile mills have been increasing their import orders. Luna: Interesting — because for the past year and a half, China was mostly destocking. They had built huge inventories during the post-Covid scramble, and then they just worked through them. Now they're back in the market? Lucas: That's exactly what's happening. The destocking cycle appears to have run its course. Chinese mill inventories are lower, and export orders for garments — particularly to Europe and Southeast Asia — picked up in May and June. The Chinese textile export numbers for May showed a year-over-year increase of about 7 percent. That's a meaningful reversal after months of flat or negative growth. Luna: So you've got a supply squeeze in the US and a demand revival in China. That's a classic recipe for a rally. But why isn't this pulling other commodities along? Usually when China buys, it's a tide that lifts all boats. Lucas: That's the really interesting part of this episode. China's demand recovery is very sector-specific right now. They're buying cotton and some other agricultural raw materials, but they are not buying crude or metals at the same pace. Their industrial production is still growing at a modest clip — around 5.5 percent year-over-year in May — but it's not the double-digit boom we saw in 2020 and 2021. And their property sector is still in a downturn, which hits copper and steel demand. Luna: So cotton is the beneficiary of a targeted restocking cycle rather than a broad-based Chinese stimulus. That makes sense. But there's another factor here: the speculative positioning. Were the funds short cotton going into this? Lucas: They were. The CFTC data from the week ending June 16 showed managed money was net short cotton by about 15,000 contracts. That's a fairly large short position relative to the open interest. So when the crop report came out with bad Texas conditions and then the Chinese buying news hit, you had a classic short squeeze. The shorts had to cover, and that accelerated the move. Luna: That explains the velocity. A 6 percent move in five days is more than just fundamentals. You need a positioning catalyst. So where does it go from here? Are we looking at a sustained rally or just a squeeze that fades? Lucas: I think it depends on two things. First, the weather in West Texas over the next four to six weeks. The critical pollination period for cotton is July. If we get significant rain, the crop can still recover some. If it stays dry, the damage is locked in. Second, whether Chinese buying continues. The destocking cycle might be over, but restocking cycles can be short-lived if final demand softens. European consumer confidence is still shaky. Luna: You know, it's fascinating how a single crop can tell you so much about the global economy. Cotton is this intersection of weather, Chinese manufacturing, global trade flows, and speculative finance. It's like a miniature version of the entire commodities complex. Lucas: It really is. And I think that's why following these niche markets can give you an edge. Everyone watches crude and gold. But cotton, coffee, sugar — those often flash warning signs or opportunity signals weeks before the big indices move. Luna: Absolutely. By the way, if you find yourself looking at commodity markets through a new lens after listening to us, that's exactly the kind of thing that makes running this show worthwhile. We keep it ad-free and independent, and listener support is what makes that possible. If you've gotten something out of our episodes, a couple of dollars a month genuinely makes a difference. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep the conversation going. We really appreciate those who chip in. So back to cotton — one more thing I want to flag. The rally has been led by the old-crop contracts, not the new-crop. The July contract is expiring soon, and it's been the most active. That tells you the squeeze is about immediate physical availability, not just expectations for the fall harvest. Luna: That's a key distinction. If it were about the new crop, the December contract would be leading. But it's not. The backwardation in the cotton curve is steepening. Lucas: Exactly. The July-December spread has blown out to nearly 5 cents. That's a strong signal that mills are scrambling for nearby supplies. They can't wait for the new crop. So the next few weeks are critical. If the July contract goes into delivery and there's not enough certifiable cotton in exchange warehouses, we could see another leg higher. Luna: And the US dollar? It's been relatively stable this week. If the dollar weakens, that would be another tailwind for cotton, since it's priced in dollars and a weaker greenback makes it cheaper for foreign buyers. Lucas: Right now the dollar index is flat to slightly lower. Not a major factor yet, but something to watch. Overall, cotton is the standout in a commodity complex that's otherwise struggling. The broader Bloomberg Commodity Index is down about 1.5 percent over the same five days. Energy and metals are dragging it lower, while cotton and wheat are the bright spots. Luna: Wheat is up too, about 1.8 percent. Is that related? Or a separate story? Lucas: Separate. Wheat has its own weather issues in the US hard red winter wheat belt and some production downgrades in Russia. But the cotton story is more dramatic because of the short-covering element and the China restocking. It's a reminder that in commodities, the most interesting action is often in the smaller markets. Luna: So if a listener wanted to track this themselves, what's the one number they should watch over the next week? Lucas: That July-December spread. If it continues to widen above 5 cents, the squeeze isn't over. If it starts to narrow, the pressure is easing. And keep an eye on the USDA's weekly crop progress report on Monday afternoons — the Texas condition ratings are the key. If the good-to-excellent percentage drops below 30 percent, that's a red flag. Luna: Good advice. I'll be watching that. And for everyone else, thanks for listening. We'll be back tomorrow with another episode.