Home Commercial trading Pre-market stocks: Cotton plunge: Recession warning or just another market mess?

Pre-market stocks: Cotton plunge: Recession warning or just another market mess?

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Every day for the past week, cotton futures have suffered triple-digit losses and the December futures contract closed below $1 for the first time since January. Cotton has lost more than a third of its price since early May. This is bad news for US economic growth: the United States is the largest exporter of cotton in the world.

Cotton is not alone in its vertiginous fall. All commodities fell in price as investors anticipate lower demand in the near future as they prepare for a possible recession. Crude oil, metals and other crops have also been hit hard in recent weeks.

West Texas Intermediate crude, the U.S. oil benchmark, fell more than 8% on Tuesday and traded below $100 a barrel for the first time since early May. Copper is officially in a bear market, sitting more than 20% below its April highs. That’s a particularly bad sign, because falling copper prices have been an oddly accurate predictor of recession for the past three decades.

The drop in cotton, however, has been particularly puzzling. Cotton products are largely discretionary, making them much more susceptible to drops in demand during economic downturns, and a severe drought in West Texas threatens to decimate this year’s cotton crop. But some economists also say the way cotton is traded makes it more vulnerable to widespread speculation and volatility.

Here’s why: when textile mills buy cotton from a merchant, they use what’s called an open-custody contract.

This means that the textile company, or factory, will draw up a contract with a cotton merchant stating that he will get a delivery of cotton in three to six months, at a price relative to where the futures contract July or December is negotiated at the time of delivery. .

At some point in the future, usually when the mill thinks the market price of cotton is as low as possible, the manufacturer will call the trader and finalize the contract at that price. Traders typically sell cotton futures on the New York Intercontinental Exchange (ICE) when they first sign their contracts to hedge their operating margin. They buy back these hedges when the price becomes fixed.

But a new class of customers has changed the way the market works. Hedge funds and other major financial players flooded the exchange with big bucks and lots of speculation. As a result, prices do not always match crop fundamentals.

Over the past two years, cotton futures have reached record highs, rising from 48.35 cents per pound in April 2020 to nearly $1.60 per pound in April 2022.

A surprisingly successful growing season last summer and a surge in pre-pandemic demand contributed to that growth, said John Robinson, a professor of agricultural economics at Texas A&M University. But a big reason for the huge rally was really just an increase in market speculation.

The Commodity Futures Trading Commission keeps track of when contracts are officially set between traders and mills and makes this information public in real time. Speculators can see how many contracts still need to be fixed and know exactly how long they have until the futures contracts expire. They know if there will be an increase in forward buying in the short term and can decide to anticipate it.

Now, however, prices have fallen. July 2022 cotton futures closed at $0.99 and December 2022 cotton futures are at $0.89, and Robinson says he is puzzled by the sudden drop.

“The West Texas crop is decimated, I don’t see how anyone can miss and I don’t understand why people who are long would liquidate now,” he said.

Managed funds significantly reduced their net long position last week, according to the Commodity Futures Trading Commission.

The anger over ‘people who are not involved in the commercial buying or selling of anything dropping a billion dollars and distributing it according to their formulas’ dates back to 2008, when cotton markets were hit hard affected during the Great Recession, Robinson said. Today, there is a growing movement among cotton growers to change how ICE futures work to prevent speculation.

Either way, he added, many cotton growers in the United States are suffering.

Federal Reserve releases minutes, Wall Street yawns

The Federal Reserve released the minutes of its June 14-15 Wednesday’s meeting, giving investors a behind-the-scenes look at the central bank’s decision to raise interest rates by three-quarters of a percentage point to combat high inflation.

The notes show that Fed members are increasingly concerned about the entrenchment of inflation in the United States and reaffirm their commitment to do what it takes to cool high prices for consumers and businesses. , even if it means slowing down the economy.

Members hinted that the Fed would likely raise rates another half or three-quarters point at its July meeting.

Fed policymakers “recognized the possibility that an even tighter stance may be appropriate should elevated inflationary pressures persist,” according to the minutes.

Markets appeared unresponsive to the new data. The shares rose slightly in the late afternoon and closed relatively flat.

“We don’t see a lot of significant new information in the minutes,” Bob Miller, head of Americas fundamental fixed income at BlackRock, wrote on Wednesday. The minutes, he said, were largely a recap of what traders already knew, explaining the muted response from investors.

The dark side of Buy Now, Pay Later

Buy now, pay later, installment plans have become popular among consumers looking to spread the cost of major purchases. But the rising cost of essential goods in the United States has led some struggling shoppers to use the payment method for smaller purchases like coffee, groceries and gas, writes my CNN Business colleague Alicia Wallace .

Economists and consumer advocates worry about the phenomenon. They say the growing popularity of these services, which have little oversight, could mean Americans are taking on more debt than is publicly reported.

“Despite its rapid growth, BNPL has sounded the alarm to economists, regulators and attorneys general. They have warned that because the services are unregulated as credit products, it has resulted in a style market Wild West with varying terms and conditions and some checks and balances,” Wallace writes.

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Two US labor market reports are due out this morning: ADP’s US Private Sector Employment Report and the US Weekly Unemployment Claims Review.