Cotton – 80 Cents is a Pivot Point

Andrew Hecht - Barchart - Mon May 15, 2023

In my Q1 soft commodities report on Barchart, I wrote, “Cotton has been consolidating around the 80 cents level since reaching a low of 70.21 cents in October 2022, less than half the price at the March 2022 high.” Cotton futures for July delivery have not moved much since the end of Q1 2023, as the price hovers around the 80 cents per pound pivot point. The iPath Series B Cotton Subindex TR ETN (BAL) tracks ICE cotton futures prices.

Cotton is trading in a narrow range

After falling 55.6% from $1.5802 in May 2022 to 70.21 cents per pound on October 31, 2022, cotton has settled into a narrow trading band.

Cotton had reached its highest price since 2011 before correcting. As the three-year chart illustrates, the price action has settled into a range with 80 cents as a pivot point for the soft commodity.

The nine-month chart highlights the sideways trading action since the November 2022 low.

Time is running short for a seasonal rally

Cotton futures tend to reach seasonal highs in the spring.

As the long-term chart dating back to 1970 shows, cotton reached seasonal highs in April 1995, March 2008, March 2011, and May 2022. At the 82.74 cents level on May 15, the fluffy fiber futures were running out of time for a seasonal rally during spring 2023.

Cotton rallies in the spring when uncertainty about the annual crop peaks during the growing season.

Prices should remain stable for three reasons

The three factors that should keep prices stable around the 80 cents per pound level are:

Cotton is sitting around the long-term average price dating back over a half-century. The 80 cents per pound level is the cotton future’s pivot point.
Input prices have increased as inflation is at the highest level in decades. However, the decline from the May 2022 high has drained the bullish sentiment from the soft commodity.
The overall commodities asset class remains in a bullish trend. Goldman Sachs analysts have called for a “commodities supercycle” over the coming years. The forecasts cited “underinvestment” in raw material production as the reason for higher future prices. While cotton is unlikely to experience a significant rally in 2023, the overall bullish sentiment in the asset class should keep prices stable around the current price level.

Buying dips and taking profits on rallies as the price drifts away from the 80 cents pivot point will likely be the optimal approach to the cotton market over the coming months.

The May WASDE report was fairly neutral for the cotton market.

The chart shows higher planting and production in the 2022/2023 crop year compared to the prior year. However, forecasts for 2023/2024 are lower, a function of lower cotton prices. Meanwhile, ending cotton stocks are edging lower each year from 2021/2022 through 2023/2024.

Handing the bullish baton from one soft to the next

Cotton and coffee futures reached the highest prices since 2011 in 2022. In 2023, the other soft commodities have exploded higher.

Frozen concentrated orange juice futures, the least liquid soft commodity, rose to $2.8790 per pound in April 2023, a new all-time high. World sugar futures rallied to 27.41 cents per pound in April 2023, the highest price since October 2011. Meanwhile, nearby cocoa futures rallied to a $3,277 high in May 2023, a price not seen since December 2015. The soft commodities sector led the raw materials asset class in Q1 2023 with an over 11% gain. The price action in April and over May’s first two weeks continues the bullish trends since the end of 2022. Cotton and coffee price peaked in 2022, but FCOJ, sugar, and cocoa have taken the bullish baton in 2023.

BAL is the cotton ETN

Trading the range around the 80 cents per pound pivot point is likely the optimal approach to cotton over the coming weeks and months. The most direct route for a risk position in the fiber is via the futures on the Intercontinental Exchange (ICE). Those seeking to trade cotton without venturing into the leveraged and margined futures arena can use the iPath Series B Cotton Subindex TR ETN (BAL). At $59.12 per share on May 15, BAL had around $13 million in assets under management. BAL trades an average of over 3,900 shares daily and charges a 0.45% management fee. The rally from the low took the nearby cotton futures contract 30.8% higher, from 70.21 cents in late October 2022 to 91.85 cents per pound before the end of 2022.

The chart shows BAL rose from $48.58 on October 31, 2022, to $63.52 per share on December 21, 2022, a 30.8% rise as BAL did an excellent job tracking cotton futures.

I am not looking for any significant price moves in the cotton market over the coming weeks and months, and I will trade the range, buying when the price drops below 80 cents on a scale-down basis and taking profits when cotton moves away from 80 cents on the upside.

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.