Cotton Production Number Shock

USDA Crop Report Reveals Production Above All Estimates at 20.4
That production number of 20.4 million bales released this morning was a shocker! When I first heard it I immediately thought that perhaps something was wrong, but it wasn’t. And since it wasn’t, I then thought about what to expect when the market opened.

My first thoughts were that prices would open 100 -150 lower and that was a good guess because cotton prices did open 100 points lower. However, there was little if any follow through selling so on the re-opening prices recovered, which may have been an indication of market sentiment towards the crop number. This disbelief stems from the reported crop conditions which have continued to deteriorate weekly. At any rate that meant the December contract, which had closed last night at 5688, opened between 5585 and 5561 (close to the 50 day moving average) and recovered soon after the re-opening to reach 5760 before backing off again. Around mid-day Dec dipped below 5600, but held, helped along when 500 lots were 5595 bid.
As the day progressed the price of December seemed to stabilize as it remained between 5600 and 5635. It wasn’t until locals, perhaps sensing weakness, or maybe just looking for additional selling to come in on the close, pressed Dec, filling the size bid and paving the way for another rest of the morning lows. Dec held 5580 putting up a good fight, but soon after the bell rang December was on the lows and hunting for stops. This quickly pressed prices further down into new lows below 5550 before any real buying was found sufficient to prompt locals to cover.

Dec settled at 5574, down 112 points on the day.

My thoughts regarding the status of the crop haven’t changed. I still believe that this crop is in serious trouble. But who am I to argue with the USDA people. They are the ones who are in the fields. They do good work and over the years have proven themselves and their methods reliable. Yet, I can’t feel that something isn’t kosher. Perhaps the yields are overly optimistic. But that’s no matter, we have to trade off of the numbers we’re given and 20.4 is the number.
What’s interesting is that most everyone that I’ve spoken with feels that the number is out of whack. There are some who simply put don’t believe it. That almost kind of tells me that had the number come out at say 19.7, more folks would have believed it and taken it more seriously and prices would have gone lower, causing more damage to the charts. But that’s beside the point. Given this number, if you believe this number, it suggests to supply side traders that cotton will sorely struggle to push higher. Technically, so far anyway, things don’t seem so bad. What with Dec futures today gapping lower on the opening, then failing to recover beyond 5660; that action suggests that Dec is probably range bound between 5660 and 5500.
I’m confused and not alone I’m sure. (And why should today be any different­) It may be time to re-evaluate my position and my expectations for price. At least for now, I have to use the evidence placed in front of me and with what I see I cannot provide any good reason to be aggressive on either side of this market right here. In fact, it may actually be an appropriate situation to look for prices to continue sideways, at least over the next couple of weeks. Therefore, why not consider selling straddles, or strangles if that be the case.
One thing is for sure, that is that cotton will seek the level where the most business can get done. It may take a week or two of sideways markets before new evidence surfaces, but I still don’t feel comfortable going short at these levels. Tonight’s close, beneath several moving averages doesn’t paint as favorable a portrait for fund traders. It may attract some back to the dark side, and they may be right. My instincts have been suggesting that cotton prices will eventually head higher. It just seems as though that time may still be a ways away.
The Dec/March spread traded between 280 and 290, widening mainly due to the move down. The Oct/Dec spread traded between 181 -185. However, the Dec’06/Dec’07 spread traded from 625 down to 610 and back out to 625, again seen as the result of fund buying the Red Dec.
Look for Support to be found at 5528, 5500, 5470, 5428 and 5405-5383 . Resistance: 5665, 5705, 5727-5741, 5769-5780, then 5807, and 5945.
We at PICO encourage you to contact us. If you are trading cotton, we’d like the opportunity to work for you. We don’t manage or administer accounts; we simply provide information and execute your orders. If you’d like to explore what we can offer, please call me at 212-748-1388.
Thank you, Jurgens.
Here’s a link if you’d like to read O.A. Cleveland’s comments.


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