By Dr. O.A. Cleveland
The bull continues to have his way as cotton prices soared to new record highs this week on textile mill price fixations (buying of futures). Both the technical and fundamental pictures remain supportive of higher prices. The U.S. dollar continues to strengthen against the Euro, but finds itself under limited pressure against the Asian currencies. Thus, the demand for cotton from the great Asian textile industry should provide excellent fundamental support for the remainder of the year. The comings weeks are poised for a fireworks show, but the delivery period, beginning two weeks from today, could prove to be little more than a dud. A 30 cent sell off could be in front of the market. Yet, the bears will have to see a 40 to 50 cent sell off before they can stifle the debate surrounding the potential for two dollar cotton. This is no time to step in front of a bull, but the market does need to come up for air, pause and look for a fresh start before charging again.
Repeating: Market prices could be in for as much as a 30 cent drop as we move toward February 18, the first notice day for deliveries against the March contract. The current wisdom is that the market longs want physical cotton to meet export requirements. However, certificated stocks continue to grow and may increase enough to allow for a reasonably calm delivery period. The March delivery period should tell the tale for two dollars. If, as first notice day approaches, prices mover closer to 190 cents, then the May and July contracts will be slated to scale the two dollar mark.
Further supporting the bull’s case for higher prices is that on-call sales for both the May and July contracts increased this week. This was impressive in that speculative funds were rolling their long March contract positions to long May contract positions (sell March and buy May); thus delaying their respective price fixing. Additionally, profit taking actually saw open interest increasing instead of the expected decline. Thus, while some funds were taking profits other funds were entering new long positions. The most recent on call sales report can be viewed at
http://www.cftc.gov/marketreports/cottononcall/index.htm
USDA will release its February supply demand report Wednesday, February 9, 7:30 central time. It is expected that consumption will be slightly increased and world ending stocks will be lowered. Both U.S. domestic consumption and exports may be increased while U.S. ending stocks will be decreased, http://www.usda.gov/oce/commodity/wasde/latest.pdf
Cotton growers are advised to price between 10 and 25 percent of their expected 2011 production. If you like the price enough to plant it, then like the price enough to price some!
