What is Behind the Recent Cotton Futures Market Plunge? (Yangxuan Liu): The cotton futures market is on the decline, having experienced a dramatic selloff starting June 17, 2022. As shown in Figure 1, December 2022 Cotton Future prices dropped from the May 17, 2022 high of 134 cents per pound to around 120 cents per pound on June 15, 2022, only to be followed by a plunge to a low of 91.2 cents per pound on June 28, 2022. The selloff has created concerns among cotton producers about this year’s profitability. What was the cause of the recent market plunge?
Cotton and cotton-related products are discretionary items. Thus, cotton prices tend to follow the economy, with rising cotton prices during economic growth and declining cotton prices during recessions. Many economic indicators point to the direction of a global economic slowdown, with the possibility of a recession in the United States. The S&P 500 index, one of the main indexes for the U.S. stock market, recorded a 20% drop in June from its January closing peak to confirm a bear market. Meanwhile, soaring inflation put extra pressure on consumers. The annual inflation rate in the U.S. accelerated to 8.6% in May of 2022, the highest since December 1981. Embedded in inflation, energy prices rose 34.6% and food costs surged 10.1%. Severe supply disruptions caused by geopolitical tension and Covid-19 reduced global economic productivity, hindered the ability to meet consumer demand, which resulted in an economic slowdown and high inflation rates globally. [READ MORE]