A full-bore breakout has occurred, partly on expectations of a much smaller crop in next Monday’s report. Estimates are clustering around 13.2 Mb for the bulls, with some at 13.0 Mb and below. Our estimate is 14.0 Mb, so obviously we are much too optimistic. Several analysts are pegging the carryout near 3.0 Mb, which would imply prices much higher. The market is trading on these ideas, and is always right. Weather can fool a lot of analysts and it appears we have erred too much on rainfall amounts since early June.
Cotton has surged this summer, leaving other commodities in its dust. Table below shows how the “board” has fared since the first few days of June. Cotton traded down to 82c and is now 6.7% higher. Tracking 18 markets from early June to today, cotton has handily beaten all the grains, all the metals, the crude products, and the celebrity of all bulls – the mighty S & P. Thanks to these summer price gains, cotton has re-asserted itself into acreage plans for the Southern hemisphere, as traders are talking of gains of 25% in Brazil and 40% in Argentina. If one were to add in the seed rebate (12c average), then the net received by a mid South farmer, less basis, is in the mid 90s.
We know when we are wrong, and this is one of those times. Open interest is rising, momentum is strong, and the bull has kicked through some tough resistance. It is puzzling to us that cotton is rising just before the Southern hemisphere plants, and will be gaining acres at a time of record world surplus. Cotton is buying back acres it lost in the last 2 years, and a price near 90c will induce some rationing. This price action also says China was laying just below the surface, and will be there with large buy orders if Dec had traded back down to the low 80s. Rumors popped up this morning about a “large” inquiry, so its clear the Chinese want the market up, and will not sell any reserve cotton any time soon. Our tech friends are very excited about cotton now, so best to duck out of spec shorts. Farmers, lay in wait.
Open interest has been rising since late June when Dec made a minor low at 83c. OI has risen from 157k to 175c, with price rising from 83c to 88c, so this move up has strength. A breakout through several layers of resistance has occurred, with the next target being the double top just above 89c. This move is contra-seasonal, but these can be quite strong and fast. Cotton not overbought, so there is ample room to move higher.