A long time ago, say 3 weeks, cotton was set to gain acres on grains for the upcoming planting season in the Southern hemisphere. But after an explosive rally of $1.50/bu on the July 2014 contract, soy has surged ahead in the race to grab acres. In less than 3 weeks July cotton has moved down from 0.71 to 0.63 against its rival in soy. In early August we were hearing of cotton acreage increases of as much as 40% for Argentina and 25% for Brazil. Those figures will have to be pared back as soy is leading any and all other row crops in profitability. With the Brazilian Real in a state of collapse, soy has moved close to an $18/bu equivalent for soy.
If one stacks up 6 major row crops using South American new crop prices on July 2014 contracts, soy comes in 1st easily, followed by rice. What comes 3rd through 6th is a close group of corn, cotton, sorghum and wheat, in no particular order. Individual yield components make any of the bottom 4 competitive with each other, but not with rice and certainly not with soy.
Cotton has meandered around 83c on the July 2014 contract, getting left in the dust by Dec 13 cotton and July 14 soy. We like selling this for South American hedgers in the upper 80s, and note that it has been fairly mild in behavior compared to the Dec 13. This is not nearly as profitable as is July 14 soy, but if China changes their inventory policy, then a hedge in the mid 80s won’t look too bad as SH harvest rolls around.
The gap at 8865 remains our preferred spot to sell Dec 13, but that would take a 4c bounce to get there. This market has been so wild recently that a 4c move either way seems likely. Specs and funds remain very long, so the danger is that they decide to punt.