Cotton prices pressured by abundant supplies, lower demand

The price of cotton has been in a tight range this year as concerns about supplies and demand continued. Cotton was trading at $78.91 on Thursday where it has been in the past few days. This year, it has ranged between the resistance level at $91 and the support at $75.95.

Weak US dollar, rising supplies 

Cotton prices have been in a consolidation phase this year in line with other soft commodities like soybeans, corn, and wheat.

The weak cotton price has happened even as the US dollar has plunged from last year’s high of $115 to ~$100. Historically, a weaker dollar has led to relatively higher commodity prices. 

The current price action in the cotton market is mostly because of supply concerns. According to the US Department of Agriculture (USDA), most cotton producers are expected to boost production this year. Production is expected to be 829k bales higher than expected. Most of this increase will come from China, which will increase production by 1 million bales. 

The US is expected to have more cotton production this year as the impact of last year’s drought in West Texas ease. West Texas is the third-biggest cotton producer in the world. 

At the same time, demand for cotton is relatively lower this year as countries like China, Turkey, and Bangladesh reduce their imports. In its recent WASDE report, the USDA said:

“On the export side, higher U.S. and Australia exports are more than offset by a 550,000-bale reduction for Brazil and a 400,000-bale reduction for India. Projected 2022/23 global consumption is 65,000 bales higher this month as a 500,000-bale increase for China more than offsets declines in Bangladesh and Turkey”

Cotton price prediction 

Cotton chart by TradingView 

In my last article on cotton, I warned that prices would continue falling because of rising global supplies. This view was correct as the price has moved to a low of $79.50. It has moved below the 25-day moving average. 

On the daily chart, the price has moved below the upper side of the descending channel. The Relative Strength Index (RSI) has continued to drift downwards. Therefore, cotton will likely continue falling as sellers target the next key support level at $70.