Cotton Easing Into Number 1 Again

agricultural, Charts, Commentary, News, Technical Analysis

The steady rise from 67c to 71c for Dec 18 has pushed cotton back into a lead position for acreage next year. In the last decade, the cotton/soy ratio has held between 0.88 to 0.42, excluding the 2010/11 year. The mid point is 0.65. The current spot ratio is 0.76, and the new crop ratio is 0.70. By a nose, cotton wins over soy. Vs corn, cotton does even better, with a decade long range from 0.313 to 0.093. Disregarding the 2010/11 year, the range is 0.24 to 0.093, with a mid point of 0.167. The spot ratio is 0.22, well above mid level, and new crop ratio is 0.18. Cotton beats corn by 2 lengths.

 

In the US, the loss of the seed rebate will have to be factored into decision making, but not so for ROW. The other factor that farmers will heavily consider, will be a record US yield, and a record tie for world yield. For the moment, the overall price, the price ratios, and the record yields suggest world cotton acreage next year will be unchanged, with perhaps a 1.5 M +/-.

Varner View

One method of estimating exports arrives at 15.75 Mb, 1.25 Mb above current. This drops the carryout to 4.85 Mb, and ratio to 25%. The ratio for 2014/15 at 24.3% matches this, and that year high/low was 71.50c/57.10c. Current price predicts even lower end stocks and ratio, but we believe exports at 15.75 Mb at least have one statistical model to stand on. The bewildering aspect of our market this year has been the ravenous demand, +4.5% from year ago, and +17% in 6 years. We read one research paper that said US and Europe cotton textile consumption was unch to perhaps slightly down this year. Those countries make up 30% to 40% of world use. In order for world use to be up overall 4.5%, that means all other countries have to rise about 7% so as to make the 4.5% world average. We are suspect of this huge jump in world use, but the hot demand for US cotton does argue that way.

Technicals

The spot chart shows a low in May at 7617, and a high in Sep at 7615. Todays high of 7582 nearly reaches that resistance. The Dec continuous chart shows what is potentially a triple high, with previous tops at 7572 and 7575. The Mar chart has 11 of the last 12 days with the daily low higher than previous day. Open interest has been steadily rising with spec buying, so the bull has the momentum for now. Dec 17 rolls off next Wed, so the chart will show a downside gap of about 200 points given current difference. No sign of a top, but the spot chart does indicate it is in an area of previous tops and resistance.


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