Cotton clearly breaks out on the upside and does it without the benefit from outside influences!
On Friday, (the last session prior to FND) a surge of buying in early e-trading drove the March contract limit up and the balance of the active months up over 200 points, before cotton prices received selling in the form of profit taking. This selling, mainly profit taking ahead of the weekend, still wasn’t sufficient to drive prices lower and new contract highs were made. Exports were the best we’ve seen in a while and showed sales of 483,800 RB (which was more than double the previous week), shipments were 207,300, RB and both better than expected.
The USDA reported that U.S. ending stocks in 2008-09 could fall to
the lowest since 2003-04. The projections pegged the carryout at 3.7 million bales, down from 8.2 million in 2007-08 and 9.48 million in 2006-07. This would be the smallest carryover since 2003-04 when ending stocks totaled 3.45 million bales and the stocks-to-use ratio was 17.2 percent. Yet despite a severe U.S. drop in upcoming cotton plantings, they also show
World mill use is expected to exceed global production by 6.5
The most active, and therefore liquid, May contract managed to close at 75.81 cents, up 85 points, after opening at 76.65 cents and trading from up 49 points at 75.45 cents to up 179 points at 76.75 cents. It traded on the screen from 75.28 to 77 cents.
March which is now in notice period, closed up 239 points
to 75.62 and July advanced 70 points to 77.41, with December adding 82 points to 81.76 cents.
All told, for the week, the market gained 680 points in March, 541 points in May, 533 points in July and 473 points in December.
Volume has been superior and open interest growing. Yet the futures pit is still slated to close on Friday.
With total use projected at 19.5 million bales, down from 20.3 million this
season but up from 17.96 million in 2006-07, the stocks-to-use ratio for
2008-09 would plunge to 19.2 percent from 40.4 percent estimated for 2007-08 and 52.8 percent last season.
The USDA projected exports at 15 million bales, down from 15.7 million this
season but up from 13.01 million in 2006-07, and put domestic mill use at 4.5
million bales, down from 4.6 million and 4.95 million, respectively.
Production was forecast at 15 million bales off plantings of 9.5 million acres, a harvested area of 8.6 million acres and a yield of 835 pounds per acre. The latest 2007-08 estimates pegged the crop at 19.03 million bales, plantings at 10.83 million acres, harvested area at 10.49 million acres and yields at 871 pounds.
Separately, USDA forecast a global crop shortfall of 6.5 million bales,
against 7.1 million foreseen for this season, with world consumption rising 2.5 percent to 129.5 million bales and production expanding 3.2 percent to 123 million bales despite the sharp U.S. cutback.
A 15-million-bale U.S. crop would be the smallest since 1998 when domestic output totaled 13.918 million bales.
China could produce 37 million bales in 2008-09, up from this season's
estimated 35.5 million, and import 17 million bales, up from 13.5 million
projected for 2007-08, a report from the forum indicated.
Open interest surged 14,229 lots Thursday -- possibly a record increase --
to 278,667, with March's down 5,055 lots to 10,530 and May's up 10,616 lots to
137,117. Options open interest jumped 15,099 lots to 377,315 -- 201,473 calls, up 8,063, and 175,842 calls, up 8,036.
Being a bull on cotton hasn’t been as rewarding as it has for wheat bulls. Until now that is! Thursday’s session was an exception. And I think an example of what we are going to experience more frequently as cotton prices receive the benefit of all the work they have done building a solid base from which to garner momentum. Let the games begin!
With Wednesday’s close in Dec above 7850, signaling a test of 8050 likely, that’s precisely what we saw. And by closing above that level makes this thing look hot to trot. Additionally, sources suggest that the USDA will cut cotton acreage estimates further and every producer I’ve spoken with tells me they should. But most of all today’s action suggests that it is the funds that are in control. Spreads are not behaving as they traditionally do. We’ve seen that exemplified in the performance of the March/May for a week now.
March goes into notice after tomorrow’s session. Mills who haven’t covered needs will find themselves in a scramble competing with specs and funds for positions as they did today. Shorts will puke and margin calls may send some lifting hedges. Option volatility should surge. In sum, if you’re not long, you’re wrong…
Trade idea: Cotton looks very strong, (Regular readers should know I have been bullish on Dec). I am still surprised with the front end of the board, but that being said, here is a trade idea. Sell the K 75 straddle (sell both the put and the call) and collect 575 points. Then buy some downside protection in the May (as I cannot shake my nervousness that a break down could occur, hey stranger things have happened). But make sure you have longs on to not only protect, but benefit from the pending strength. I am long the upside already by owning futures and some calls in Dec, but that is the key, make sure you have long calls, or call spreads on in Dec. or at least in July and have more on than the number of straddles that you sell, say at least 3 times as many.
Si quiere más información, por favor contáctenos,
El equipo de Brokers de Futuros USA
Fuente: MF Global
©2007 Jurgens Bauer & Associates all rights reserved.
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