Dollar Cotton for the 2011 Crop?

Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University

The trading for the week ending October 29 saw another historical high. Let’s not say the top is in, but if not then it almost is. Technical indicators do not suggest a high. Yet, the market does give some appearance of being exhausted following all the limit up and limit down days, the expanded limit up and limit down days and the most ferocious volatility ever. There are few buyers left. Yet, those that remain continue to be very active. Let’s not say it is over, but it’s time to pick up your marbles and go home.

A laundry list of concerns continues to support the bulls:

• The lower than typical U.S quality and the potential lack of cotton that can be certificated for delivery against the contract.
• The Chinese crop could be as much as three million bales smaller than the current USDA estimate.
•  The likelihood that the Pakistani crop will be further reduced.
•  The Chinese appetite for cotton at all time record high prices.
•  Indian merchants saying they cannot make delivery of large quantities of cotton that had been sold to Pakistan,
•  How much West Texas cotton was lost to last week’s storm.
•  Too, the profits that have already been taken by fund managers only encourages them to keep putting money in the cotton market until some technical signal suggests otherwise.

The single bearish note is really one of caution in that the market is measurably overbought. In fact, the statistical calculations indicate cotton is most overbought of all traded commodities. Yet, cotton market remains the speculators darling as it has been the single most rewarding of all commodities.

The Wall Street Journal missed the boat on this week’s action as it took the Wednesday limit down day as their commodity headline story saying it was the worst all time loss in cotton’s history. It was the biggest one-day loss ever, true, but that loss simply followed the biggest gain ever and the total of all gains dwarfs the Journal’s “worst loss ever.” The market was simply consolidating, and still is.

The market has been on such a run that we analysts are jaded. One report indicated that weekly export sales were not good. Relative to the past couple of months, that was true. Yet, relative to all of history excluding the past two months, export sales were excellent. Net sales of Upland and Pima for 2010 and 2011 totaled 300,800 running bales.

The real story this week, in spite of new historical all time highs, was the December 2011 contract. This week will likely be recorded as the week cotton began to bid in earnest for 2011 planted acreage. The new crop December contract gained a giant total of 412 points on the December 2010 contract during Thursday’s trading. While the Dec 2010 made up some of that Friday, December 2012 was the beneficiary of very strong gains last Friday. The December 2011 contract is now making its pitch for the dollar level.

Look for new crop to scale the dollar ladder as the 2011 planting season approaches. Grain merchants and elevators have made a significant push over the past few weeks to get growers to forward contract 2011 grain production. I have never known elevators to brow beat growers to forward contract. Elevators are very aggressive and this aggression comes well before the “typical” planning horizon for planting decisions. The battle is on. The cotton market has now fired its first shot.