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No Relief For Llano Estacado


The super-producer district 1-S has received some rain in late Feb, but all 3 events since then have been only slight amounts.  Subsoil moisture in 1-S, 6, 10-N and 10-S is several good rains away from being conducive for crops.

Specs keep buying, and the trade keeps selling it to them.  Mills are eager to buy even though prices are $100/b above the summer low, but they are loathe to fix prices now.  This stacks up buy orders beneath the market, but it also forces the demand to surface and be satiated.  One newsletter alluded to the heavy positions for both spec and trade, and suggested that the July contract somehow would explode upward due to heavy trade buying to cover shorts.  But they did not point out the invert from July to Dec, around +200.  With full carry at 100 points/month, July is thus a fat 700 points above what is required to carry cotton from July to Dec.  And there is no mention of penalty stocks, which would rack up more costs.  These newsletters thus ignore the peril the specs face when the time comes to decide the fate of the July contract.

Varner View

Much of the determination for long term price discovery for cotton lies with the grain markets.  Barring severe weather in this growing season, grain prices are projected to be lower than current spot markets, and maybe much lower.  Other drivers such as weather, the world economy and the price of poly may not be as dominant as the magnetic pull of the Chicago grains.  If corn goes to surplus, and soy and wheat move into more comfortable carryouts, all go to some small increment around cost of production.  Cotton’s average world cost is 80c, but the seed premium has become so large as to lower the overall cost input for cotton.  With Dec rising to the upper 80s, there is plenty of risk to the downside for farmers.


Cotton has a very reliable history of making important highs during March.  Our look at this history since 1995 indicates that in years that had sharp price increases going into a March high, there was on average a 21% price decrease to follow.  The problem with depending on this study is that there have been major or all-time highs in March, and the price drops after were breath-taking.  Most of the highs that occurred in March were during the 2nd  week.  Be alert for price reversal or other top pattern.