Not that we read a lot of articles in an accounting magazine, but there was one recently by Nikoleta Panteva in Accounting Today that made us think. In an analysis on high risk sectors of what they called “Farming and Food” industries, the writer claimed that the cotton market exhibited the highest risk of the 10 markets. Her reasoning was simple – 80% of the US crop is exported, exposing US cotton to severe risk in case of a rising $. This is something we as traders often ignore, and would rather focus on such things as yield, sales trends, GDP, etc. But this is one other bearish factor, among some pretty big ones, that could affect our market as we get into the new crop year. For comparison, only 10% of corn is exported, and roughly 45% for both soy and wheat.
The market is always right, but some say it is rather inefficient, so perhaps the best description is that it eventually gets things right. At 90c futures, a broad guess is that it is predicting a carryout in the 3.0 to 3.2 Mb range. This carryout suggests a lower crop size, and/or higher exports. Since we have a rather dim view of exports, the market is saying that our crop estimate of 14.0 Mb is wrong. 90c says the US crop is around 13.25 Mb. There is also a cut coming from China in the report, about 1.5 Mb, due to drought in central eastern growing areas. This is 4.2% of production, and should not be a price factor due to their stocks hoard.
Report is due 1100 central time Monday.
The Chinese stocks issue will determine 95% of price discovery over the next year, and all else will determine the other 5%. If the Chinese sit tight and import 11 Mb, then price is right between 79c to 94c. If they import only 7 Mb, then something between 75c to 85c looks right. But the third scenario is that they move to a long term plan to pare down stocks, and that’s where all hell breaks loose. A new plan could have a huge impact on the market does, especially the Dec 14. We are preparing a special report on just this scenario for planters, and will have it mailed out to our farmer list next week. The consequences for Dec 14 and Dec 15 are so severe that farmers must think and plan ahead, if they see themselves growing cotton in the next 2 years. If the Dec 13 pops up over 8950 and runs a mess of buy stops, then the first hedging for Dec 14 should be thought long and hard. Technicals
The only minor support is at an intra-day low of 8805. Target for this move remains 9180. It should be no surprise about a mass of buy stops at 8950.