This was one of those old-fashioned trading days, as the dollar sank to a new 4 week low, and nearly the entire board showed gains. This is how things used to be, and how Bernanke wants them to be. The energy markets did not follow, but those markets have been on a roll since making major lows in mid April with crude at $85. If the broad CRB has begun a major price reversal, cotton never suffered the summer bear markets as did so many others.
Cotton has done well enough to close much of the gap between grain prices, and if one added in seed rebates, then cotton is pretty much in the thick of things as Southern hemisphere growers make their decisions. Assuming a 3c basis, and a 12c seed rebate, growers are eyeballing a net of 94c on the July contract. SA basis levels are notoriously large, so it may not be quite fair to assume just 3c in this example. Regardless, something above 90c net puts cotton nose-to-nose with soy at $12 and corn at $5, which have their own notorious basis levels.
Varner View
Allow us to venture out on a limb and throw some attention to the crop for Dec 14. At 80c futures, and a seed rebate of at least a dime, something near 90c net must be considered as a profitable hedge. There are two very real dangers for the Dec 14, one being that China eventually eases away from hoarding cotton. And the 2nd is that grains prices may be much lower next year than now. Reasonable yields and offtake will mean growing surpluses for grains into next year, and probably so for cotton. Falling grains prices and unstable Chinese bureaucrats could mean a disaster for Dec 14 cotton.
Technicals
What is now a triple top at 8950 probably will not hold, as technically based traders see these price levels as sure-fire stop-loss triggers. Trying to find a possible target for this move higher, we go to the spot continuous chart, and construct a trend line across highs of Mar and June. This line crosses today at about 9180. One other thing to make note of regards the triple top for Dec at 8950. This is also the spike high the spot contract made in June 2012, when July 12 jumped from 6610 to 8948 in 2 weeks.
