The Gartman letter put out another bull case story for cotton this week. It cited the fundamental reason being lateness, with only 27% of the crop setting bolls. On this, we point out that cotton used to be a 6 month ordeal to grow, and is now only a 4.5 month growing season. Its been a long time since the Llano Estacado got a real weather scare from an early frost or freeze, as the crop has mostly matured and opened by late Sep. So a crop that is on average a couple weeks late should be inconsequential. The other reason Gartman gave for being a cotton bull is his perception of a “reverse head and shoulders.” We are very suspect of any head and shoulders, and whenever we think we see one, it mostly disappoints. Gartman does have a much higher visibility than does the Cotton Row Journal, and there may be some coattails on his recommendation to be long.
Most of the reason for the mini-rally in cotton has been due to cert stocks being cut in half, from 650kb to only 250kb today. This is a widely expected event, and it is our guess and rough calculation that cert stocks will soon get down to 200 kb. At the same time cert stocks are being taken out, the carryout is going back up. The export pace has been surprisingly very weak, and new crop sales have been puny. The old crop carryout a couple months back was only 3.3 Mb, and now its looking like it will be 4.2 Mb. This suggests a price around cost of production. But new crop is now the price setter, and we think the carryout will rise by adding 300 kb to the carryin and 500 kb to production (at least). That would be a carryout of about 3.7 Mb, which implies a price range in the 75c to 85c band.
Varner View
The dollar reversed its slide today and that was enough to get the entire board on one of those all-in “risk off” days. Lonely rice was about the only market showing a + at 1230. Other than the cert stocks action, there is little going on in our market, with weather for the moment a non-issue. Grain markets are in their most critical period of the summer, and it would not be surprising to see a couple of wild Mondays in front of us. Use rallies to sell cotton.
Technicals
Dec has been in a 4c range for 5 weeks, and a 7c range for almost 6 months. There is ample momentum in store when – not if – cotton breaks out. Stops are building on both sides of the breakout points, which are 8400 and 8600. Tight indeed. Seasonal is negative, as are we.
