Cotton prices have grinded higher since the beginning of December as one can see by the chart below. In this time frame prices of July futures have appreciated approximately 17% lifting trade to their highest levels in 27 months near 97 cents/lb. This likely has something to do with the most recent US cotton harvest being the smallest in 4 years. Compounded by the fact that there appears to be an appetite for Ag commodities with speculators and funds alike.
In recent weeks cotton remains range-bound in a sideways market consolidating just above 90 cents. A penetration of the up-sloping trend line identified by the white line would be a game changer in my eyes. We are seeing the roll from May futures to July keeping the market a float but as that slows and/or the trend turns I expect the depreciation to accelerate.
The fact that cotton prices are breaking down in the face of the recent dollar weakness is another cap in the BEAR’s hat. Exchange certified deliverable stocks are increasing ( near 266,000 bags). Acres will increase as higher pricing has enticed farmers to shift more acres towards cotton as the USDA reported. Further speculation that ending stocks could double in the coming season if Mother Nature cooperates…a number of bearish fundamental factors as I await a technical confirmation.
Let’s also throw into the mix a seasonal tendency. While past performance is NOT indicative of future results I try to recognize patterns. Selling July cotton futures on or about 4/7 and covering on or about 5/4 has been a profitable transaction 14 out of the last 15 years to the tune of 4.7 cents …translation in cotton $500 x 4.7 = $2,350. Will we be celebrating on Cinco de Mayo that it worked in 2014…who knows…time will tell. Again past performance is not indicative of futures results.
Cotton Futures chart for April 9, 2014
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