ThursdayΆs drop in cotton prices was in sympathy with the grains and soybean complex as fund sellers reduced their exposure of all row crops without making the distinction of individual commodities.
Plus, falling corn and soybean prices are likely to push producers towards cotton as its price has not suffered as much, resulting in more area and, therefore, potentially more production.
Once traders have reviewed cottonΆs situation in greater detail, they will understand the odds of higher production in the US is low. However, larger cotton crop sizes outside the US are growing, so ThursdayΆs behavior is in part justified.
Another factor that may explain cottonΆs break was ΅last day of the month, last day of the quarterΆ timing.
The proverbial book-squaring occurs the last two days of the month and typically carries over to the first day of the new month. With funds very long cotton (the latest CFTC COT reports did show a modest reduction) and prices setting back since March 15, more profit taking may have occurred.
However, despite ThursdayΆs near unchanged close, futures settled higher on the week and on the month.
My technician made mention of the higher monthly close in his outlook for April.
He says, “Nearby cotton had its first serious correction since November, but still closed higher on the month. The larger up trend is undisturbed, but it has room to allow an even deeper correction. A simple 50% adjustment will permit a drop to the 81.50 level and seasonal habits imply that could happen in April. If it does, watch that price area for a reason to buy.”
Since cotton is often led by stocks, the strong performance put in during March should continue to be supportive.
However, stocksΆ values are over-bought and the DJIA is ahead of its average percentage gain of 5.1% for years ending in 3. Dave, my technician, has a mixed opinion regarding crude oil but is friendly towards soybeans. The outlook for corn is negative for old crop but friendly for new, begging the question which will win.
Finally, with a negative view of DJ/UBS commodity index, cotton has some work in front before any recovery.
