|Going Up Backwards|
|Last summer, cotton went up the normal way the front led the back. This time up, cotton is going up backwards, with May and July gaining on spot Mar. Normally one would assume that with spreads widening, the overall price would be declining. Carry is being pushed into old crop spreads but instead of a falling price, carry is coming mainly by the back months moving higher. July reached within a cent today of a price we always associated with rationing 80c. It is a strange market indeed.
The NCC released their survey of plantings, at 11.02 M acres. The survey was taken from mid Dec to mid Jan, with an average price of Dec 17 at 7000. The NCC estimate current crop exports at 12.8 Mb, compared to the Feb report at 12.7 Mb. Dec today is +4c over the average when the survey was taken, and it is a simple step to assume that acreage prospects will be above the NCC survey. Our estimate has moved up to 11.5 M, but we would not be surprised to see something closer to 12.0 M when the March Intentions comes out. Not only is price surging, but weather is setting up the Llano Estacado for a good start. Heavy rain is falling today, with some spots getting over 1.
Price rationing began in the old crop/new crop spread last summer, when July moved above par to Dec. In early Jan the Jly/Dec spread went to +300, and has traded from there to +600 in the last month. This spread represents hard rationing, and the carryout does not justify this spread. We like the bear side, but caution traders that it can be erratic and wild. Try one at +475, and another at +525, then hang on. Price rationing for outright is very close at hand, and may be beginning to turn mills away from cotton with July a few ticks from 80c. Demand has surprised us as to how strong it is, for so many months in a row. Feb USDA report did confirm that key Asian countries continue to have to replenish inventories from a year ago, and there is no sign of a letup.
Spreads are behaving in what used to be called the butterfly, with the middle months leading both the nearby spot and the out months. May has gained 100 points vs Mar in a month, and over 300 points vs Dec. Open interest change from option expiry will be known tomorrow, and our guess is around a 15k contract decrease. Soon to be spot May is trading around the high of last summer, making this price area key long term resistance.
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