The rally from 75c to 79c in the Dec has definitely pulled back some acres that would have been lost to corn and soy in recent weeks. Grains have moved lower while cotton has had a decent rally in the last 6 weeks. Cotton vs corn ratio was around 0.11 a year ago, and today stands at nearly 0.20. No longer is cotton a loser to corn, as it is probably in that grey area of comparable parity. Cotton remains a poor alternative vs soy, but has moved up from a low of 0.41 in July 2012 to 0.64 today. A year ago the ratio for spot contracts stood at 0.53, so cotton is higher on both corn and soy in relative terms than it was in Jan 2013.
Sales last week were seen as poor by some traders at 89 krb. The US needs to average 104 krb/week to make the target plus a rollover. Exports were still sluggish at 154 krb, but after the holidays these should pick up dramatically.
Varner View
The history of cotton sales and shipments in the fall and transition to winter has been that the rest of the world would sell in front of the US, while farmers placed most of their cotton in the loan and waited. Then the US would kick into gear after Christmas and make the majority of sales. Not this year. The sales picked up 3 months ago during the peak of harvest, and have continued into the holidays. The US now finds itself like other countries in previous years, as it has basically sold a much larger % of available supplies and the market must now throw the brakes on. A 9c rally, a tight basis, and parity in spreads have all combined to throw a little cold water on demand. We see old crop as being too cheap at 8100, and with a chance to test a slightly higher level. New crop? Sell in the 7925 to 8100 price band.
Technicals
We mentioned the 21 day average yesterday as a support point for cotton, and it was almost perfect. The 21 day is at 8273 and the low today was 8268. Next objective is the .618 retrace at 8562. Seasonals are positive.
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