Patience remains the order of the day as the cotton market remains in its now seven month old trading range around 54 cents. While the recent weeks have seen the market spent a bit of time below 54 cents, a 54 cent equilibrium price is fairly well established. Declines to the 52 cent area have uncovered mill business while rallies above 54 cents have cut off most exports.
Additionally, in recent weeks, rallies above 54 cents have tended to pull more cotton out of the CCC loan program. This strongly suggests that the market will get all the cotton it needs-and some-out of the CCC loan for the remainder of the year. The narrow three cent-52-55 cents-trading range remains in play and will continue for at least another month. However, large scale plantings will begin in about three weeks. At that point in time, Mother Nature can affect the market as she so chooses.
For now, the sheer volume of U. S. cotton stocks held in the CCC loan program, and the 600,000 plus bales of certificated stocks will keep a heavy lid on the market. Too, certificated stocks are now working their way toward 700,000 stocks. Yet, given that the market is covering only part of the carrying charge, owners of certificated stocks are paying a fortune to control the stocks.
The owners of the stocks-very large merchants and cooperatives-are not comfortable paying storage over an extended time period. The owners must feel that the market has a bit of rally in the future. Too, a rally near the end of next week should be anticipated.
USDA will release it March planting intentions report on Friday of next week. U.S. upland acreage could have an 11 in front of it, but will likely be a very low 12 something. Look for about 12.2 million acres of upland cotton to be planted. Certainly any total acreage number below 12.5 million acres will be bullish. The lower the intended plantings the higher the price rally. Too, also remember that the report will be based on market and weather conditions as of March 1.
In the face of a market in price equilibrium, there is considerable bullishness in the air. The Wall Street Journal published on Tuesday a major story on the bullishness facing the cotton market. Additionally, large fund managers and index fund managers seem to be wetting their pants over the prospect of jumping on the cotton bulls back.
These funds hold large long positions in cotton futures at present and, from what they say, are adding to their positions on a periodic basis. Yet, while the bear is off the market's back for now, he can, with favorable conditions from Mother Nature, take the reins again.
Signs do point to price improvement in the coming months, but not for old crop contracts-just the new crop contracts. Certainly any rally in the back end of the market will pull the front end higher, somewhat. However, the only potential for a significant price increase is tied to new crop fundamentals.
However, with a market in equilibrium and facinga greater probability that total available supply will fall below demand, a price increase should be expected. Thus, the market will rally in line with traders expectations of the amount of reduction expected in carryover stocks.
Speculative fund managers are talking in terms of New York moving to 70 cents. I too, can build such a case. However, the case is built on both increased demand from China and a decline in world cotton production. Chinese consumption will increase, without question.
However, as my broken record spins, Mother Nature holds the hand that determines production. Thus, the reason I like the idea of buying December put options on any move in December near to 61 cents. Cotton keeps on giving with excellent fall weather, thus do not discount the possibility of record yields.
