U.S. Cotton Production Poised for a Rebound This Year
Fundamentals
The improvement in Cotton prices the past year should finally lead U.S. Producers to plant more Cotton this upcoming season. Average analysts’ estimates are for U.S. Cotton plantings to total 10.40 million acres, or nearly 14% above last year’s meager 9.15 million acres dedicated to Cotton. If true, this would be the first rise in Cotton acreage in 3 years, as new-crop Cotton futures are finally competitive with that of Soybeans and Corn. The global economic recession has hurt Cotton demand the past couple of years, as end-users kept inventories lean. Now that there are signs of a rebound in consumer demand, mills are expected to increase their Cotton purchases. However, lower Cotton production the past few years has kept U.S. carryout levels tight, with traders estimating 2009-10 Cotton carryout at only 3.2 million bales. The tight carryout totals could become an issue for Cotton end users should the improvement in consumer sentiment levels translate into improved demand for textiles this year. Dry weather in Texas has allowed Cotton plantings to begin in the Lone Star state, with the USDA reporting that 4% of the crop has been planted so far this year, which is slightly ahead of last year’s pace. All eyes will now turn to the USDA’s Prospective Plantings report due out on Wednesday morning at 7:30 Chicago time to see the first government estimate of the number of acres that are predicted will go into U.S. Cotton production.
Trading Ideas
Cotton prices have moved into a consolidation phase, with July Cotton trading within a 5-cent price range the past month. With the prospective planting report ahead and the upcoming growing season just beginning, Cotton prices could become more volatile, as weather conditions move to the forefront in traders’ minds -- especially in the Cotton growing regions in the Mississippi Delta and Texas. Traders looking for an increase in Cotton price volatility may wish to investigate the purchase of Cotton strangles. An example of this trade would be buying the July Cotton 85 calls as well as buying the July Cotton 78 puts. With July Cotton trading at 81.20 as of this writing, this strangle could be purchased for about 530 points, or $2,650 per strangle, not including commissions. The premium paid would be the maximum risk on the trade; with the trade being profitable at expiration in June should July Cotton be trading above 90.30 or below 72.70.
Technicals
Looking at the daily chart for July Cotton, we notice the month-long consolidation pattern that has kept prices within a relatively narrow 5-cent range. The short and long term-moving averages are sending conflicting signals, with prices well above the longer 100-day moving average, but trading below the short-term 20-day MA. The 14-day RSI has turned neutral, with a current reading of 52.34. The most recent Commitment of Traders report shows both large and small speculators are holding net-long positions in Cotton, with both groups having added to their long positions last week. This sets-up a scenario where we would need to see prices move above resistance near the 84.00 cent areas in the July futures to spur further buying momentum. However, should support at the lows of the recent trading range near the 79.25 fail to hold, the large speculative long positions may be liquidated, adding additional selling pressure that could set-up a test near the 75 cent area.
Mike Zarembski, Senior Commodity Analyst
