After some seriously bullish news coming out of China last week, I’m feeling even better about 2010 cotton acreage today than I was then. Bloomberg.com reported Monday that hedge fund managers are becoming more and more interested in cotton because they are seeing signs that the U.S. economy has hit bottom and a rebound has started … more money in consumer’s pockets for t-shirts, underwear and all that …
Hedge fund managers could not care less what commodity they are trading. They don’t care if it’s cotton or soybeans or swine flu masks. Where they see strength is where they put their money. (I’d say put your money on all three at the moment.)
And, yeah, I know – it’s still 2009. But in reality, as far as acreage goes, 2009 is in the rearview mirror – there’s nothing we can do about it now.
Unless you haven’t priced your ’09 crop, the ICE/NYBOT December 2010 contract is where your focus should be. The only reason I look at December ’09 is because the spread between December ’09 and December ‘10 is interesting. At the close Monday, December ‘10 was over 7.5 cents per pound higher than December ’09. What does that tell you? Well, it tells me that the supply and demand fundamentals are better for next year. The trade sees either a tightening of supply or an increase in demand. Ideally both.
Now for another example of why I look at spreads. November of 2010 soybeans on the Chicago Board of Trade were 55 cents per bushel lower than November ’09. That market is upside down. Either the supply will be higher, or the demand will be lower. I suspect the supply will be higher.
But let’s get real: November ’10 soybeans are at $9.00, and even with a basis of $1 under, that’s still $8.00 cash. December ’10 cotton is 68.00, and assuming a 5-cent basis, that’s just under 63-cent cotton. Soybeans still have an advantage, but the gap is closing.
The cotton market is going to sell off pretty soon. It’s hard to maintain momentum after six consecutive up days and a 5-cent gain over that time. That doesn’t mean the fundamentals have changed for the worse, it just means that the long positions have money made and they’re going to take some profits. But as long as the market is trending higher – and it has been since early March – I’ll be patient. Planting decisions for 2010 are a long way off.