78 Cent Cotton? The Opportunities are There.
With apologies to Yogi Berra, prediction is difficult, especially when it is about the future. Another way Yogi said it, “It ain’t over until it’s over.” The opportunity for the nearby cotton futures prices to top 78 cents remains strong – rather, possibly I should say the opportunities are numerous.
All of these thoughts come to mind as I view the various events surrounding the cotton market. Too, another comes to mind – Cotton is Powerful, It can Make or Break Any Man. There is a lot to celebrate, as this past week was also the 48th anniversary of The Day the Music Died.
The leading sentence in last week’s comments was “cotton prices jumped higher all week and have now seen higher closes on seven of the last eight trading days.” Now comes another week of trading, and prices were up in five of the last six trading sessions. So it seems the road to higher prices is higher production.
Economics does not support that comment. So let me ponder on my thoughts of the titanic bullishness that has captured the cotton market.
The older trading range will return – that is, 71.50 to 78.50 cents. Price activity pounded the 78 cent barrier this week and, like its previous battle, failed to beat the big door down. While the market has 11 days before March goes first notice and May becomes the spot month, we are in the very short rows for a price breakout. Yet, there will be more opportunities.
Mills are doing nothing more than kicking the can down the road and continuing to hope they can stop their hemorrhaging. I doubt they can do little more than attempt to pick some pricing points near the bottom of the price range. Yet, as they desperately try to cover the disastrous pricing decisions they have made this year, the lower end of the range will actually creep higher.
There are three events that must be viewed in any attempt to understand where the market may go:
- First, unfixed mill on-call sales versus on-call purchases are extremely bullish. The old crop ratio is 11:1.
- Second, the speculative managed money funds have established an all-time record investment in cotton futures.
- Finally, open interest in cotton futures is near the all-time record set in 2008. Only the February-March 2008 time period had a higher open interest.
Three events, all screaming BULLISH at the same time and drowning out any other sound.
The current market represents manna from heaven for the speculator, and funds have experienced very profitable gains that are set up to continue into June. Thus, cotton futures trading should remain very active at least into the early summer. While the quantity of cotton still in grower hands is limited, the quantity of cotton covered by futures or option contracts remains large. Thus, grower profitability is at stake as well as mill profitability.
Yet, this is the year for the grower and speculator, and not for the mills. Mills are simply in a squeeze of their own making and should have known much, much better.
Mill on-call sales for March are 32,383 contracts versus 3,807 on-call purchases, or a very bullish near 8:1 ratio of futures contracts that must be purchased to those that must be sold. Viewing the total old crop situation (March, May and July on-call sales), the ratio climbs to near 11:1 in favor of futures buying versus futures selling. Thus, the buying pressure is not going away.
Maybe, and let’s hope the market keeps rolling. But then, as in the past, the economist comes along and spoils all your fun. Well, I don’t think I am going to spoil the fun. We have already had the fun, and we will have a little more. But for now, I think the market has shot its wad. Now, there is no major price drop coming. It is just time to slow down and catch our breath and make sure we can “hold on to what we got.”
The market is consolidating, to use a New York term. Holding on, I think, is almost guaranteed. There is plenty of bullishness in the market. The bearish factors are not really bearish as much as they are “consolidating” factors. The market will back into the lower-to-mid level of the trading range and search for new fundamentals to trade, with a bias back up to the up-end of the range.
Early in the week, the cotton market established a classical key reversal trading day. Key reversal days are unusually rare and, as such, hold great predictive power. In a rising market like this one, the requirements of a key reversal are that the current day must open higher than the prior day, it must trade higher than the prior day high and lower the prior day low, and then it must close lower than the prior day low.
That may sound easy to accomplish. But all conditions, as I said, rarely – seldom, if ever, so to speak – occur in the cotton market. Two adages of trading cotton: (1) never bet against the trend, and (2) never bet against major technicals.
In the coming few days, the mills will do the same thing they did in December. In the 11 days before first notice, mills will buy a “few” contracts, definitely fixing the price they pay for some cotton. However, most of their activity will consist of spreading – they will kick the can down the road. They will buy the March contract and sell the May contract and later be caught essentially in the same squeeze they are in now and were in back in December. Come mid-April, when the May contracts moves to first notice day, mills will buy the May and sell the July. In the meantime, they will gradually fix prices in the 71.50 to 74.00 cent range, and hopefully not end up in the same fix they are in now…and were in this past December.
How did all this come about? Months ago, mills thought they could buy cotton at 69 cents and below, so they delayed their pricing decision. They had poor advice and have failed to take advantage of price pullbacks to the lower end of the trading range. Their DNA tells them that prices are going lower. You might recognize this – the growers’ DNA is made up of higher prices.
A final word. Exports continue to explode. As I have stated for over a month, the world is hungry for the record high quality U.S. crop, and it remains the best deal on the world market, with excellent quality and a low price. We have discussed for three weeks now that both India and Pakistan have been big buyers – a market fundamental rarely seen.
The market is not in trouble at all. It is just that the 78 cent market cap is made of solid lead and is lined with the petroleum-based acid fiber polyester – one of the world’s leading pollutants, yet loved by name brand clothing manufacturers and apparel importers.
Give a gift of cotton today.