USA : Cotton market not focussed on cotton fundamentals
fibre2fashion.com
onkers and Parabolic; the cotton market according to Mike Stevens...My "bridge too far" last week seems a bit immature with cotton prices soaring more than 500 points this week. Yet, this week's rapid advance will just mean the astrologist's Big Bang theory will have specific meaning to the cotton market the near future.
The futures market, in no way, is trading near term the fundamentals of cotton, but rather perceptions of the future. For now, the market is considerably overbought, based on near term fundamentals (supply and demand). Yet, the market is very reflective of market conditions for the New York December 2008 contract and contracts through 2010.
The parabolic analogy reminds me of taking paregoric for stomach discomfort--when it was legal--it made, for those with a prescription, everything in the world perfect; and we know human interaction is rather imperfect and commodity markets are nothing more than human interaction.
How can one go against the higher prices? If the May contract can post a solid close above 80 cents, the short term sky can be grasped within our hands. However, the inability to move above 80 cents during the coming week, in not sooner, will signal a pull back to 72-75 cents.
The price bridge has been constructed "too far" for the near term. Yet, it has a very solid footing for the 2009 and 2010 New York contracts. Specifically, I am short term bearish and long term bullish. The nearby contracts could experience as much as a 500 point correction. Yet, the long term expiry contracts are 1000 to 3000 points higher.
The crux is that the cotton market is not focused on cotton fundamentals, but rather the fundamentals associated with the grain contracts, relative to ethanol (energy) demand and the food crisis relative to vegetable oil consumption. Neither the energy crisis (man's dependence on fossil fuels) nor the food crisis (vegetable oil, non trans-fat) can see a near term solution before 2010. Thus, the daily grain and oilseed markets will continue to dominate the cotton market; prohibiting cotton from trading on its own fundamentals.
Certificated stocks are climbing and now total near 580,000 bales with about 40,000 additional bales under review. This signals that the best market for US cotton, at current prices, is for delivery against the New York futures contract--not for actual consumption.
More importantly, the subtle meaning is that the delivery process is not following economic theory. Additional evidence of economic imperfections in the New York futures contact has been the failure of cash and futures prices to converge during the delivery period. Spot cotton traded for as much as 1400 points off the New York nearby March contract this week-and March futures are in their delivery period.
Thus cotton growers, holding physical cotton, have gained only a very small share of the recent price increase. Too, US merchants have been unable to make any appreciable export sales as prices have run away from textile bids. More importantly, with respect to economic problems with the New York contract; merchants, in this period of advancing prices, have been unable to effect an effective hedge for cotton they have purchased (or have considered purchasing) from the grower.
I remain a proponent of selling December 2008 call options at the one dollar ($1.00) or better strike level. The risk is that the New York December contract will rise to the dollar level. The worst scenario then would have pricing your cotton for one dollar plus the premium collected from selling the call option. One dollar--not bad!!!
Price volatility will remain the order of the day, as well as the tendency for the market to follow the grain and oilseed complex. Additionally, the advance in all commodity prices finds support, unfortunately, from the absolute collapse of the value of the US dollar over the past six years. The economic hole dug by the US government is very deep and is only serving to exacerbate the global energy and food crisis. |
