Managed Futures’ Cotton Exposure
Societe’ General sees coffee and cattle as two markets that will face substantial selling in order to get these markets “rebalanced” according to new valuations and previous market moves. Cotton will get some buying, as Soc Gen predicts a 14% increase in average volume on the buy side.
Jeff Gundlach of DoubleLine Funds predicts the rate on US 10 Years will drop below the previous record of 1.38%. This will be due to the end of QE and poor world-wide business conditions. This guy has been dead right before, as he bought bonds last winter. The 10 Year is at 128 now, up from 123 last year. It would have to trade 136 for rates to fall below 1.38%.
A couple months ago, these pages opined that new crop world stocks could drop by about 15 Mb, due to a combination of higher use (3.5 to 4.0%) and less acres. This idea was confirmed by perhaps the best long term analyst in the cotton market in the world, John Bondurant of Memphis. This guy knows macro trends and he is on to the idea of a drop of 15Mb, or more, in the new crop from world stocks. The problem cotton has is that this has to go on for 3 years in order to get stocks down to a manageable level. Farmers will have to be satisfied with small profits in the next 3 years, and be hyper-alert to sell rallies when they occur.
Varner View
Here is a thought for the long, longer term. Say the world does manage to lower stocks by about 15 Mb a year for the next 3 years. Once this purging is complete, the issue then becomes who’s left? Once stocks are in line, there could be much fewer planters around as they sold off equipment that was sitting around the barnyard. Gins in this area are being mothballed, torn down, or taken apart and sent elsewhere, as we are seeing the dismantling of the infrastructure that is necessary to grow, gin and warehouse cotton. This is very worrisome, as there will be better times ahead, but its going to be a tough 3 years or so for those that wish to keep their operations in cotton. Same opinion, buy breaks for a slow upward grind.
Technicals
Not much change in the cotton chart, today we take a quick look at Brent Crude. BC is near 2 major support areas, the first is a low in Jan 2007 at 5075. The low so far this week is 5115. A trend line coming off lows in 1999 and 2001 crosses near 4900. The last time BC traded 5100 was winter 2006/07, and cotton was remarkably at the same price it is today, 6000ish. After crude bottomed in 2007 at 5100 it rallied to 14750 (all-time high) in 18 months. Cotton also bottomed and rallied to that infamous peak of $1.10 in Mar 2008.
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