ADVICE ALERT! Price the first 10% of expected 2014 cotton if December 2014 futures can hit 77 or better. Reasons follow.
WeΆve been steadily approaching the upper boundary of a longstanding sideways trading range in cotton futures for a week or so. All it took was a report of limited deliverable stocks against futures and a better-than-expected jobs data report to nudge prices above that upper boundary and it triggered a bunch of buy stops. The buying fed on itself to give us triple digit gains and an impressive “upside breakout” on the charts, all the way out to new crop December 2014 futures, shown here:
The week in review: The market ended strong today, but fundamental news was mostly bearish this week. The Wall Street Journal reported retailer inventories so burdensome heading into Christmas shopping season there is likely to be considerable carryover needing mark-downs after Christmas and that translates into slack demand for products containing cotton.
Then there was another feature story in the WSJ about shoppers spending less over Thanksgiving weekend. EverybodyΆs expecting next weekΆs December WASDE from USDA to show bigger U.S. and global cotton production and ending stocks.
USDA comes out with its December WASDE report on Tuesday and that may bring a mix of bullish and bearish revisions. Here are pre-report trade expectations:
The average estimate for production is 13.2 million bales, up 100,000 from November. Estimates range from 12.9 to 13.4 million.
The average estimate for ending stocks is 3.0 million bales, the same as in November. Why? Because analysts expect USDA to raise its estimated export figure by 100,000 bales, neutralizing the hike in production.
MY VIEW: These estimates are surprisingly price friendly. I expected to see private analysts averaging a 200,000 to 300,000 bale increase in crop size and possibly a reduction in the export forecast due to the fact that sales YTD are running behind normal as a percentage of USDAΆs current forecast for the marketing year.
THIS IS WHY IΆM ADVISING THAT YOU START PRICING NEXT YEARΆS CROP IF DECEMBER 2014 FUTURES CAN HIT 77 OR BETTER AHEAD OF TUESDAYΆS REPORT.