Market Volatility Has Arrived; If You Snooze, You May Lose
March 3, 2014 There are certainly no dull moments in the cotton ring as bulls and bears constantly face the threat of triple digit price moves. The increased price volatility discussed over the past month has surfaced and will remain a fixture well into May and possibly June.
The market’s loyalties are divided between the very bullish on-call sales building in both May and July and the bearishness of the nearly 10-cent spread between the old crop July contract and the new crop December contract. The bridge between the two contracts cannot withstand such a span length and must contract.
The real question is how?
We took a stab at that last week. But a case can be built for almost any path the market might take. I favor a few more hits at the 90 cent-plus level, but those hits will be short lived.
The bullishness of the aforementioned on-call mill sales is looking bigger than tractor tires to my eyes. I look for the mills to get burned, not merely scorched. The mills may well have to pay up to the market to fix the price on those sales, and one side effect will be increased export cancellations.
The result would tend to be very bearish for new crop price activity and will slice growers and merchants two ways. Merchants would tend to back away from forward contract purchases without exceptionally wide basis offers. Too, export sales would likely slow as coops and merchants face the challenge of who to do business with, as well as justifying sales to lenders.
Cotton prices flashed above 90 cents this week and immediately proceeded to lose nearly 400 points before holding the 86.50 cent mark, a three-week low. Yet, by week’s end the market was once again staring 88 cents in the face.
Be prepared for more of the same. Most feel the May New York contract will see 84 cents again, but they also express the market will make runs toward 90 cents. Maybe I’m splitting hairs, but I doubt the mills themselves will not allow the May contract to slip much below 86 cents. They will be very aggressive in fixing on-call sales prices and prevent the market from falling below 86 cents, at least until near mid-June.
The battering ram will continue to pound the 90 cent door and will have some limited success. Yet, unless the spring passes without moisture falling on the vast Texas drylands, don’t look for the July contract to hold that level.
Commingling old crop and new crop fundamentals, the flip side is that the December contract will not be able to sustain a rally above 80 cents (and probably not even to 80 cents) as grower price fixations at that mark would simply overwhelm any price rally. The magic pricing point for most growers this year seems to be 80 cents. Yet, the potential for December climbing above that level is almost entirely nonexistent in the absence of spring moisture over West Texas.
My high-to-low price range for the December contract is a rather wide 16 cents, from 88 cents down to 72 cents. The anatomy of that forecast rests first on the historical 80 percent probability of a 16 cent price range on the December contract, coupled with the questionable possibility of a total failure of moisture falling on West Texas. The remaining assumption is that, even with adequate moisture in West Texas, world production outside China (cotton available for world trade) will only marginally add to world carryover.
Export cancellations continued for the third consecutive week as China cancelled 44,900 RB last week (128,000 in three weeks) and Turkey cancelled another 13,600 RB last week (50,000 RB in three weeks). We had been told cancellations would be forthcoming, but were also told that this had been agreed to by the merchants.
Weekly cancellations are not a current problem. Yet, the issue bears close monitoring.
Don’t snooze in this market. The volatility for the December put options is a low 17 percent. Thus, one might consider buying the put option if 74 to 75 cent futures represent a profit.
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