On Monday, February 24, the May contract hit a high of 90.44 and then struggled the next several days to reach if not exceed that level, only to fail. A pull-back of 432 pts occurred, with a low of 86.12 on Thursday, February 27, as specs had overextended their buying with net longs at multi-month highs.
In the 3 days since, the May has recovered by 313 pts and closed at its best level in a week. My technician expected a lower close on Tuesday, March 4, due to a negative daily cycle. Obviously that did not occur.
As for Wednesday, March 5, he says: “May cotton closed better than indicated and looks strong enough to suggest we ignore WednesdayΆs negative cycle as well.”
Some weeks ago I mentioned the potential for 92 cents, although a re-test of the 2013 high of 94 cents seem unlikely. The odds of US carryout dropping to, if not below, the 2010 level of 2.6 mln bales has changed the limited outlook for prices. When we combine the rather large number of on-call mill contracts to be priced in the May and July, any breaks will be well supported, with spec buying pushing futures into new seasonal highs.
With few, if any, sizeable changes expected to world production in next MondayΆs report, any overt market reactions will be due to other portions of the supply & demand report. Into and through this month and April, traders will be focused on the US planting intentions report due out March 31. Planting will get underway across the southern areas of the Delta and Southeast as well as south Texas and its upper coast.
China will increase its planting activities, as will Pakistan and several other key cotton countries. The 2013/14 world crop may not have much of an impact on prices going forward but how good a start occurs with the 2014/15 crop will shape the Dec 2014 contract.
US producers have entered scale-up selling orders from 78.50 to 82.00 on a portion of their potential production. The drop to just below 76.50 this past week with the Dec 2014 contract has had a few reconsidering their acreage allocation especially with corn (up .50) and soybean (up 1.00) prices rallying a bit the past month or two but with inputs already bought by many, any changes will be small going forward.
With the December up 2 cents from its recent lows, the price of puts has fallen, helped also by a drop in volatility. For producers interested in buying puts, the 75 cent is reasonably priced. I also like the 75-69 put spread and for those who understand the risk. I would include selling a 90-cent call for the purpose of pulling the cost below 100 pts. Should the December rise by another 2-3 cents, producers may be able to roll their puts up by the same amount and raise their level of protection from 75 to 77 or 78 cents.
