Going With the Crowd
No surprises in the report, as our market has been way ahead of pricing in a bearish scenario. US production was about right at 22.5 Mb, now its up too Mother Nature as to how W TX and GA run through Aug. Right now both areas need rain. Shipments at 17.2 Mb may creep higher, but are also in the ballpark. As for world numbers, both major producers slipped a little in use, and this is definitely the worrisome issue, that the world economy is cooling. Not a recession, but a notch lower.
The dollar was basically flat today, but ag markets again showed they are the favorite bear, taking an all round pounding. Corn disappointed a lot of traders, locking limit as the herd could not exit longs fast enough. Turns out midwest farmers were pretty capable of planting in the rain.
A 35% ratio pegs cotton futures to trade near the loan, and this looks like a fair price. The only issue is that there is no weather premium for a scare, if W TX continues dry or there is a hurricane that comes calling. Or an early freeze in Muleshoe. We thought a month ago a fair price range was 62c/68c, and that didn’t work out. The brief long trade clipped us for 65 ticks. One force that just may prompt a rally is the $, as it appears to have rolled over. If a weather scare does materialize, the dollar and Mother Nature have the clout to run the specs.
There are plenty of major and intermediate lows in the month of Aug, and it only takes a quick scan to see this history. Call them “pre-harvest” lows. One potential measurement for a low that we thought would come in Nov, is an equal leg measure. The first leg down on the spot chart from 9650 to 7000 can be subtracted from the high of 7950 to get a target of 5300. That would put physical cotton below loan.
As always, please use protective buy and sell stops when trading futures and options.
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