Did Speculative Money Cause the Recent Surge in Cotton Futures Prices?

If you drive around the countryside in the Cotton Belt in October and November, you will encounter snow white cotton ready to be harvested. This is the busiest time of the year for cotton producers and when they receive the reward for a hard year’s work. For many producers, this year’s harvest combines good yields and good prices, which is rare for cotton producers.  

The USDA Crop Progress report, released on November 8, 2021, indicated 98 percent of cotton bolls opened nationwide, with 55 percent of cotton acres harvested. Crop condition has remained steady this year, with greater than 60 percent of cotton rated in good-to-excellent condition since the end of July. The November 2021 USDA World Agricultural Supply and Demand Estimates (WASDE) report projected U.S. cotton production at 18.2 million bales this year, slightly over the U.S. cotton demand – 15.5 million bales of exports and 2.5 million bales of domestic mill use.  The U.S. ending stocks-to-use ratio is forecast at 18.9 percent for the 2021/22 marketing year, slightly above last season, but below each of the previous three years.  Globally, 2021 cotton production is projected at 121.8 million bales, which is 9.6 million bales greater than last year. World cotton mill use is projected slightly higher than production at 124.1 million bales, 3.2 million bales above last season, and the second largest on record.  

Current supply and demand fundamentals support high cotton prices. However, it is hard for cotton supply and demand fundamentals to explain the recent price surge. Since the middle of September, cotton prices skyrocketed, with December Futures rising from the mid-90 cents per pound to a high of 121.67 cents per pound on November 2, 2021. If supply and demand fundamentals cannot explain the price increase, then what could be the cause of the recent price surge? 

Historically, cotton prices tend to follow the stock market, with a rise in cotton prices when the stock market rises and a decline in cotton prices when the stock market drops. Cotton markets have been on an upward trajectory since April 2020, with a recovery of futures prices from the low 50 cents per pound to over 100 cents per pound starting in October 2021. In recent weeks, the stock market has been on a roller coaster ride (Figure 1). As money flows out of the stock market seeking the next opportunity for a short-term gain, other markets like cotton can experience an inflow of speculative money, pushing prices higher. This flow of money into cotton markets has pushed prices to levels that exceed those indicated by supply and demand fundamentals, creating a potential marketing opportunity for cotton producers. However, the flow of money in and out of cotton markets can also make prices unpredictable and volatile, thus making it difficult for producers to predict the direction of cotton prices. Speculative money could continue to push cotton prices higher; however, when speculative money leaves cotton markets, prices will fall sharply (possibly with a temporary correction below the price supported by global cotton supply and demand fundamentals). For now, producers may want to consider completing 2021 crop marketing at very robust price levels. 

Figure 1. Cotton 2021 December Future Prices (Blue Area) and S&P 500 Index (Blue Line).

Liu, Yangxuan. “Did Speculative Money Cause the Recent Surge in Cotton Futures Prices?Southern Ag Today 1(47.1). November 15, 2021. Permalink