Cotton Basis Strong, Demand High

MrTopStep.com

Varner Brothers

The cotton basis is strong, demand has been hot, and consumer confidence is near a 2-year high. Morgan Stanley’s Allidina Monday on CNBC opined that GDP growth next year may hit 3%. Currently the range for most analysts is 0.5% to 1.5%. Copper has moved up 9% since the early Nov low, and is seen as the “canary in the coal mine” for economic leading indicators.

Chinese oil demand was +10% YoY, and hit the 10 Mbd level for the first time ever. The economy is getting better, and some say much better.

So why is cotton stuck in the low- to mid-70s, with all of this good news around? The 800 pound gorilla is that little stack of 20 Mb in China that they don’t need, and nobody wants to see.
Varner View

Given the right set of outside forces, cotton could easily mount a modest rally. A declining dollar, and old crop grains in hard rationing mode would likely lift Mar futures another 3c, maybe 5c into the upper 70s. The cotton market shifts from one that has been focused on supply to one more sensitive to demand this month, and history has been kind to cotton following Dec. Our numbers for tomorrow’s SD report call for US prod at 17.6 Mb, exports at 12.0 Mb, and end stocks at 5.55 Mb.

Technicals
The 89 day average at 7400 is providing nearby resistance. The 21, 34 and 55 day averages cluster in the 7225 area, that provides support. Seasonals turn up in late Dec. Buy pullbacks.

View Comments