July cotton futures have been extremely volatile over the last two weeks as the market works to make traders on both sides of the market uncomfortable before finding an “equilibrium”. Though the market is well off the recent highs, the market is still nearly 14% higher since the start of the year.
The Technical Outlook
Like many other agricultural commodities, the 20-day moving average (purple line in chart below) is in play for cotton futures and has been acting as support since the start of the year. Coming in just below the 20-day moving average is a key Fibonacci retracement (orange line in chart below) near 93.08. A break and close below these technical indicators could trigger additional long liquidation with the next downside objective coming in from 90.12-90.40, which represents the 50% retracement, the old highs from October, the breakout point from February, and the 50-day moving average. If you are holding onto old crop cotton, you may consider using options as a way to keep the upside open while establishing a minimum price floor for the futures market.
Seasonal Tendencies
Past performance is not necessarily indicative of future results.
The seasonal charts below show season averages on a 5, 10, 15, 20, and 30 year average. Below is a color key for the charts.
Seasonals are far from perfect, but we like to use them alongside technical and fundamental analysis to build actionable trading or hedging strategies for clients. As you can see from the chart below, March can be a choppy and non-directional month while April looks to be more friendly.
We back tested the data from the end of March to the end of April and found that July cotton futures have trended higher during that time period for 8 of the last 10 years with the average gain being roughly 4.92 points. The two down years averaged a decline of 1.865.
Looking at the December cotton futures (below) we see a similar seasonal setup. You can also see that once we get past May, the trend shifts to bearish. If you are a producer of cotton, you’ll want to be cognizant of this. Our team is available to help devise a trading or hedging strategy tailored to your needs, don’t hesitate to reach out!
What does the USDA say about the 2023/2024 outlook?
Global production is up about 100,000 bales to 113.0 million as a larger crop in India more than offsets lower production in the United States and Argentina. India production is projected up 500,000 bales to 25.5 million bales but still down slightly from the previous year. U.S. production is projected down over 300,000 bales to 12.1 million bales, the lowest level in nearly 40 years.
Consumption is raised nearly 500,000 bales to 112.9 million. China consumption is forecast up 500,000 bales due to strong imports, and India consumption is projected up 300,00 bales on higher production.
Global trade is up nearly 400,000 bales to 43.2 million as China imports and India exports are both raised this month. China imports are forecast up 900,000 bales to 12.9 million, more than double the previous year’s level. This is partially offset by lower Pakistan and Turkey imports, each reduced by 200,000 bales due to lower consumption. India exports are raised 400,000 bales on a larger crop and competitive prices.
Global ending stocks are forecast down over 300,000 bales to 83.3 million with reductions in India, Pakistan, and the United States offsetting a projected rise in China.