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February 3, 2012

The speculative hedge funds attractiveness to cotton was demonstrated this week as technical indicators pointed higher. Strong support also came Friday on the week’s close as both old crop and new crop were up well over 100 points with the announcement that the U.S. unemployment rate fell to 8.3 percent. This economic news provided a major boost to cotton. Both new crop and old crop prices also found excellent support in USDA’s Thursday export report indicating that U.S. weekly shipments climbed to a marketing year high of 366,000 RBs. Too, the major portion of the exports went to China. December climbed above the nearby March on the week, but both are trading above 96 cents. December prices should continue to run ahead of the March contract. Additionally the May‐July 2012 contracts are mounting a significant challenge of the dollar mark. 

USDA will release its February supply demand report next Thursday at 7:30 AM central time. The monthly AgMarket Network will broadcast its live analysis of the report Friday morning at the same time. Look for world consumption to be slightly higher with world production lower. World ending stocks are predicted to be some 1‐2 million bales lower. Crop reductions will likely be seen in China, Pakistan and India. 

It was not unexpected that the March contract fell below the December market. The large index speculative funds, required to be long on all positions, began the week rolling their long March contracts to long May contracts. Thus, they are selling March futures and buying May futures…remember the funds are required by stature to be long. Thus, with the March contract’s first notice day rapidly approaching, the May contract will soon become the nearby contract. 

While the bulls were boasting about the marketing year high for export shipments, the bears were busy pointing out that weekly export sales (as opposed to shipments) were negative because of the large number of prior sales that were cancelled. However, the market seems to think that the cancellations were actually replaced with non U.S. cotton. Thus, the “negative” export sales did not trouble the market as consumption (demand) was not affected. That is, the market’s perception was that demand was not affected by the cancellations. 

Weather concerns in the U.S. and intentions by Chinese growers to reduce plantings as much as 8 to 10 percent are the basis for the strength in December prices. There remains time for moisture to cover West Texas, but foreign plantings will be down a minimum of six percent. Additionally, West Texas has never had a good crop without subsoil moisture and it is most doubtful, most doubtful, than anything near normal subsoil moisture now has time to accumulate. With December above 96 cents growers are advised to book some 10 to 15 percent of their crop. December could still see a range from a low of 85 cents to a high of 120 cents. I do not expect the December 2012 contract can climb above 108‐110 cents. I do like the idea of pricing a small amount at the 96 cent level.

 

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