This market has been pretty good with repeats, having made 3 sharp rallies since last winter, and it appears is now into its 4th ride. One catalyst that surfaced was a reduced Chinese production estimate by the Minister of Agriculture, and the other was a deluge of rain in several provinces of India. The Chinese news, even if true, should not be significant, as it matters not if China’s crop is 40 Mb or 20 Mb. Their policy is to lock up the domestic cotton and dole it out to mills at $1.40. Chinese stocks have tripled from what they used to carry over in normal times, and a decrease in end stocks from 59 Mb to 55 Mb is statistically not an issue. Rains on open cotton in India, the world’s largest producer is significant, so today we show a map to highlight the situation there.
Rains of 3” to 6” have fallen in Gujarat, Haryana, Madhya Pradesh, Rajasthan, and Uttar Pradesh. Table below indicates what percentage of total acreage that province has. The most acres (36%) are in Maharashtra, with Gujarat at 18% and Andhra Pradesh at 15% of the total. The USDA’s estimate for Indian production is 28 Mb, and our last estimate was 31.5 Mb. Rains of 5” over several days can definite wreak havoc on a crop, as witnessed by what happened in the Delta during Hurricane Rita. Crops in most provinces are not at high percentages of open bolls, so damage done could be kept to low levels of quantity lost.
STATE % OF TOTAL ACREAGE
Andhra Pradesh 14.6%
Gujarat 18.4%
Haryana 5.0%
Karnataka 1.9%
Madhya Pradesh 6.1%
Maharashtra 36.0%
Orissa 10.0%
Punjab 5.0%
Rajasthan 3.0%
Uttar Pradesh 0.3%
Varner View
Events in China and India have begun yet another rally in a US market that has a tight carryout and a late crop. Specs have a lot of room by which to add to shorts, and the charts have changed from neutral to bullish. Here we go again. It will take at least a couple weeks to assess real damage to the Indian production, which had a chance to reach all the way to 32 Mb. That level may be out of the door now. With the pivot in price all over the 8500 level, we are taking our loss for specs and standing aside. For producers, we will keep hedges in the 8575 area, and wait to sell more in the 8800-8900 are given the chance.
Technicals
The breakout has occurred above 8600 and all trends have turned positive. Dec is above all key moving averages, but it is also above the trend line off the Nov and June lows. The most likely target is the gap at 8865, and next the .618 retrace at 8930. Short term traders can buy a pullback toward 8600, and take profits at the targets.
