Allow us our own small conspiracy. Politics in Georgia matter much more to price right now, than does the crop, or what will be planted in that state. Inverse correlation between cotton (and other commodities) and the $ for the last 2 years has been very high, and recently one can see a good example in price reversals of 11/02. The $ put in an intermediate top, and the commodity herd took off to the upside. That reversal was just a few hours before the election, and our guess is something like this may happen again for the Georgia election, only opposite. Given that polls and betting lines in recent weeks have tilted Democrat, the $ has traded accordingly and sunk like a rock. But what happens if one of the Repubs squeaks through and wins, keeping sourdough Mitch McConnel in charge of the Senate? That would be $ bullish, and could prompt a corrective rally. And that would prompt a broad commodity correction.
At 80c our experience indicates that cotton has entered the window of price rationing. While not extremely painful to mills, 80c futures is a price that begins to deter use, and push spinners into those dastardly synthetics. 80c is also a price that says a shortage is real, and the carryout is not 5.7 Mb. We do believe the carryout is closer to 5.5 Mb, but the crop size is finally close to reality. Its all about demand now and into spring, and that has been one hot tamale.
Using the USDA Dec SD figures, we arrive at a price box of 80c/55c, for an avg around 68c. The price avg has been about right so far, and with the spot month kissing 80c today, we have to ask once again is this about right for a theoretical high? Could be, if one could ignore all of the outside noise. Inflation, a sinking $, rising grain prices, copper at an 8 year high, and the SP at all-time highs, say more is coming. We have seen the balance sheet change from what could have been an 8 Mb carryout last May to one that is perhaps 2.5 Mb below that. And if the sales pace keeps up, a carryout at 5 Mb flat can be visualized. For the near term, our eyes are on Georgia, and the $. Forget the "longer" term for the moment.
Chart below shows the price channel once again held price, although Mar teased with a breakout before dropping back into the channel later today. The + seasonal from 11/21 to 1/02 has worked almost perfectly this year, as has the negative seasonal for the $. Now what? A correction in both seems likely, and the $ did bounce back sharply after hitting a new 33 month low. And, price is strongly diverging from momentum. Be alert.