Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Cotton Prices Plunge 7.5 Percent in a Week
Transcript
- Lucas: Cotton futures just had their worst week in months — down seven and a half percent in the five trading days through this morning. Luna: That is a big move for a soft commodity. What happened? Lucas: A few things lined up. First, the USDA's weekly crop progress report on Monday showed U.S. cotton planting is way ahead of schedule — seventy-five percent planted versus the five-year average of sixty-two percent. That surprised the market, because expectations were for maybe sixty-seven, sixty-eight percent. Luna: So traders saw a bigger potential supply coming and sold. But that alone wouldn't cause a seven-and-a-half percent drop in a week, right? Lucas: Right. The planting news was the trigger, but the sell-off got amplified by two other forces. One is the broader commodities rout we've been seeing — crude oil is down more than eleven percent over the same five days. When the macro mood turns risk-off, commodities across the board get hit, and cotton is no exception. Luna: And the second force? Lucas: Speculator positioning. The latest Commitment of Traders report showed that managed-money funds were sitting on a large net long position in cotton — about forty thousand contracts. When prices started falling on the planting data, those funds had to unwind quickly. That selling fed on itself. Luna: Right, the classic long squeeze in reverse. But what about the demand side? We've been hearing about China's textile exports slowing. Lucas: That's the third factor. China is the world's biggest cotton importer, and recent data shows their textile output has been softer — partly because of weaker global apparel demand, partly because they're shifting some production to Vietnam and Bangladesh. That overhang has been weighing on prices for weeks, and this week it just accelerated. Luna: So where are we now? Cotton is around seventy-seven cents a pound? Lucas: Seventy-seven point four two, to be exact. That's down from about eighty-four cents just two weeks ago. Technically, we're testing support levels that go back to late 2024. If we break below seventy-five cents, the next floor is around seventy-two. Luna: And what does this mean for something like a T-shirt or a pair of jeans later this year? Lucas: It's a mixed signal. Raw cotton is only about two to three percent of the cost of a finished garment. So a drop like this won't show up as lower prices at the mall anytime soon. But for companies like Levi's or VF Corporation, which own brands like Wrangler and The North Face, lower input costs could help margins if they lock in prices now. Luna: So we might not see cheaper clothes, but we could see better profit margins for apparel makers. Lucas: Exactly. And that's something investors in those stocks will be watching. But there's another angle: the inflation picture. The latest CPI reading for April, released last week, showed headline inflation still elevated at an annual rate of around three point three percent. Core inflation, excluding food and energy, is even higher. A drop in cotton prices could feed into core goods disinflation, but it takes months to work through the supply chain. Luna: So the market is pricing in a softer demand environment globally. Is that the right call? Lucas: That's the big question. On one hand, the planting data suggests U.S. farmers are increasing acreage, which could mean a bumper harvest in the fall. On the other hand, if demand from China picks up — and there are signs their economy is stabilizing after the property slowdown — we could see a rebound pretty quickly. Cotton is notoriously volatile. Luna: And we've also got the weather factor. Any crop concerns? Lucas: Not yet. The southwestern growing regions are getting adequate moisture. But the Atlantic hurricane season starts in a week, and the Gulf Coast growing areas will be on alert. A storm hitting Mississippi or Louisiana in August could flip the supply outlook overnight. Luna: So for now, it's a bearish story, but with plenty of potential catalysts for a reversal. Lucas: Exactly. That's why I'm not too quick to call a bottom here. The speculative unwind may not be finished. If the dollar keeps strengthening — and it's been rallying this week on hawkish Fed comments — that puts additional pressure on dollar-denominated commodities like cotton. Luna: And the ten-year breakeven inflation rate ticked up to two point four percent yesterday. So market-based inflation expectations are still elevated, which might normally support commodity prices, but right now the macro fear of slower growth seems to be winning. Lucas: Right. The market is in a 'bad news is bad news' mode, not a 'bad news is good for commodities because it means more stimulus' mode. The rotation out of cyclical commodities into defensives has been pretty clear this week. Luna: One last thing: the XOP, the S&P Oil & Gas Exploration & Production ETF, is down two point four percent over the same period. So it's not just cotton — energy stocks are feeling the pain too. Lucas: That's the broader context. When crude drops eleven percent in a week, it drags down sentiment for everything from copper to coffee. Cotton just happened to have its own specific catalyst on top of it. Luna: So what's the one number to watch going forward? Lucas: I'd say the USDA's monthly supply-demand report on June 11th. That's when we get updated global production and consumption estimates. If they cut demand forecasts further, cotton could break below seventy-five cents. If they hold steady or raise exports, we could see a dead-cat bounce. Luna: Alright, we'll keep an eye on it. Thanks Lucas. Lucas: Thanks Luna. That's the Commodities Economy for today.