The Goldman Sachs commodity index has moved sharply higher in the last 2 weeks, from 624 to 654. Energy, oilseeds, metals, cocoa and cotton have risen sharply. Spec positions in cotton have moved to a very large net long position, about 75k. Two other periods have seen the spec this long, those being winter of 2008, and fall of 2010. Open interest has surged during this rally, rising from 157k at the late June low of 83c, to 208k current. A 10c price rise has resulted in a 50k contract increase, so one can deduce that 5,000 contracts came into cotton for every penny up.
The commercial side (merchant, producer, mill, etc.) has added to shorts almost tick for tick for what the spec and funds have added to longs. The size and % of these positions is nearing extremes going back to the 2007/08 year, but history shows that they can maintain these levels for weeks, even months. The only real enemy the spec has is harvest in full gear, and because of a small, late crop, he can stay long without fear of any new certification.
Rainfall amounts over the Southeast were in the 2” to 3” range for AL and GA. There was one location in Florida that got 9”, but there is no cotton in this county. The Southeast needs a hot, dry finish to what may be the wettest growing season in 3 decades.
The crop size is likely closer to 13.5 Mb than 13.0 Mb, but it is also not 14.0 Mb as was our estimate 3 weeks ago. Too much rain in the Southeast and not enough in Texas has chewed up more production potential. The steep inverts are doing their evil best to push business away from the US, as the market is trying to ration a carryout that represents about 10 weeks of use. Theoretically that means come mid Oct of 2014, Uncle Sam is out of cotton. Looking back at historical charts, this is perhaps the earliest of all rationing efforts, and by the extreme values of the spreads, it is our firm belief that this rationing will work like a charm. Farmers must view the invert as a must-sell opportunity. With Dec 3c over Mar, this equates to about a 6c premium the farmer gets for selling his cotton on Dec rather than Mar. It’s a cinch. Sell now, and buy Calls on the back months if one wants to keep some long exposure.
Chart shows open interest increase since the late June low. Shown on the bar chart is one possible Elliott wave pattern. The Sep 2012 high was major 1 up, and the Nov 2012 low was the major 2 down. Major 3 up ended in Mar at 8920. Major 4 down ended in June at 8172. From there, we have to count the high of 14 June as the minor 1 up of the major 5. Two down of 5 ended in a sideways triangle on 1 Aug at 8534. Thus, if any of this pattern is correct, then the current move up is 3 of 5. A small correction, then another new high would complete the entire move. Our confidence in this pattern is shaky at best.