Table attached shows our crop estimate, at 13.43 Mb, roughly 400 kb bigger than the latest USDA number. Our yields are better than the USDA in Texas, the Carolinas, and Alabama. Texas is the real wildcard, as this crop can be anywhere from 4.0 to 5.0 Mb. If the USDA accepts our number, then expect them to increase exports by at least 200 kb. As for other parts of the report, the real wild card is what happens in India. The USDA has this country at what we consider a worst-case production at only 28.0 Mb. A yield breakthrough in India over 500 #/a will push the crop well past 30 Mb. Our yield estimate of 515 #/a implies a crop between 31.0 to 32.0 Mb.
In the September press release, the ICAC mentioned that cotton was maintaining a premium over poly, which in Aug averaged about 15c. The historical relationship between cotton and poly is one where for decades one or the other was hardly ever more than 10c +/- over the other. The 2010/11 bull market blew this old relationship to pieces, and current Chinese policy tends to keep cotton above poly which works to discourage cotton consumption. The abysmal rebound in cotton consumption following the recession is partly due to record prices 3 years ago, and poly keeping a safe discount vs cotton.
Varner View
Cotton has managed to bounce from 8200, and has drifted down into a price level where demand is rising. It will be at least another month before harvest can bring much cotton into the pipeline, so we expect a grinding sideways market until then. Our preference is to wait for a chance to put on short hedges for farmers and short trades for specs in the 8500-8700 area. We have given up on the idea of selling Dec above 8800.
Technicals
The 200 day avg is at 8385 and that’s about where Dec was trading as this was written. The trend line, and the 89 and 144 day avgs converge at 8570. Sell Dec there on a rally. Seasonal trend is positive into 21 Sep.
