Will Mother Nature's Wrath of Expected Gains in Cotton Acreage?
Today's Idea
Given the prospects of significantly higher global Cotton production this year plus continued solid demand for old crop Cotton, some traders may wish to explore old-crop/new-crop bull spreads in Cotton futures. For example, old-crop July Cotton is currently trading at a 70.45 cent premium to the new-crop December Cotton contract. Traders who decide they would like to trade this strategy could buy July Cotton and sell December Cotton, with the hopes that the price differential would continue to widen.
Fundamentals
Record high prices for Cotton has producers worldwide looking to expand the acreage dedicated to this crop and we shall know more about the intentions of US producers when the USDA releases its widely anticipated Prospective Plantings report on March 31st. Current estimates are for U.S. producers to plant over 13 million acres to Cotton this season, up sharply from the 11.038 million acres planted last season. If we assume average Cotton yields this coming year, the U.S. could produce over 23 million bales. This increase in acreage is necessary to help meet the increasing global demand for Cotton, especially from China, which is the world's largest consumer of Cotton. Though U.S. Cotton prices are still close to all-time highs, U.S. Cotton exports are remarkably strong. The USDA reported U.S. export sales totaled 567,100 bales for the week ending March 17th, of which 353,300 bales were for old crop Cotton. This past week's sales now put U.S. Cotton exports up nearly 40% compared to this time last year and demonstrates how strong global demand really is. Though it appears certain that global Cotton will increase this season, the one thing that is not in the control of producers is the weather. Texas, once of the leading Cotton producing states, has experienced a severe winter drought, which has sparked some concerns that the Cotton crop could be off to a poor start unless much needed moisture returns this spring.
Technical Notes
Looking at the daily chart for December Cotton, we notice that since the highs were made back in February, prices have been in a consolidation phase. This should not be much of a surprise, as many traders begin to position themselves for the USDA Prospective Plantings report later this week. For the past several weeks, December Cotton has traded on both sides of the 20-day moving average, giving neither short-term bulls nor bears the advantage. Longer-term, traders may note prices remaining well above the longer-term moving averages, which likely favors the bulls. Volume has fallen since its spike in early March but we should see increasing interest in the new-crop futures after the USDA report is released. The next major resistance point for the December contract is seen at the contract high of 135.76, with support found at the low of the recent consolidation phase at 113.00.
Mike Zarembski, Senior Commodity Analyst
