Well it’s been an interesting ride so far huh? We have seen the 6, 7, and 8 handles across multiple contract months. July went on a limit up speckled ride and flirted with 90 cents. Although, it never hit 90 cent the idea of it was exciting. However, we have been on a steady slide downward ever since. It was taking slaps to the face daily on small slips downward, but then those slaps turned into an all out whooping and we are now back to the 6 handle.
So what’s causing all this? Well let’s start with July because lets be real, it’s the most fun to talk about. July went buck wild because the supply of cotton in the US was seemingly getting tight. Exports were strong with several weeks back to back over of over 500k bales (NC & OC combined). Also, spec trade seemingly fell in love with cotton (which is what in part took it to the levels that inspired the higher acreage number which I will discuss in a moment) but when we got this ride up to almost 90 we saw a short squeeze (shorts exiting as they were losing) taking it higher, followed by profit taking by longs taking it lower. Then the funds lost some confidence in cotton (or whatever their reasoning) and made a mass exodus, which has us back down toward the 60s.
Now let’s talk about December which hasn’t been as exciting, but is a more important contract in the eyes of most producers. When July went on it’s wild ride it did pull Dec up with it a bit, but it was a drop in the bucket compared to what we saw in July. Here are some thoughts on why. First, we got hit with a huge acreage number on the acreage report 12.2M acres! This is over 20% more acres than last year and equates to production of over 19.2M bales. This is an example of the market doing its job. The prices of cotton became supportive/profitable and the prices of other commodities are not that hot, so the producers responded with more acreage. So, that’s a big crop weighing on that contract keeping it somewhat tame. We don’t know what is going to happen with this crop. Will it be a bumper crop? If so, will it drag Dec much lower? Well, there are also some bullish factors for the Dec contract. 1- We don’t know if all the acres will be planted. 2- Demand has been solid. 3- Weather issues began showing themselves early in WTX and other cotton areas with preventive plant issues as well as emergence issues.
Will the bullish outweigh the bearish crop number? I don’t know. The global picture will play into this as well, being that most cotton producing countries are expected to have increased production as well. For now the Dec contract has contradictory forces weighing on it, and who will win the tug of war between the bulls and bears is unknown. Right now the bears have a head start (with this recent downward spiral) but I wouldn’t turn the lights out on it just yet though with weather markets and a speckling of bullish global news….we could see some more rallies into Fall. Also, we all know the Dec contract likes to be a bit dramatic the closer we get to it.
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