Will Bears Be Washed Out Of The Cotton Market?

Fundamentals

Not every U.S. grown commercial cash crop is looking at near record yields this year, as the Cotton crop has had its share of weather issues. Too much rain is the current problem with the crop, as heavy rains in parts of the southeastern U.S. have hurt the quality of the crop as we near harvest. Mississippi is especially a concern, as an estimated 70% of the bolls were reported opened. Fortunately, most of the rest of the southeastern growing region is reporting delays in crop development, which has prevented damage due to the inopportune timing of recent rains.

The weekly crop progress report released on Monday shows 50% of the U.S. Cotton crop was rated good to excellent. However, 19% of the crop was rated poor to very poor, with Texas reporting 30% if the crop as poor to very poor. Even though this year’s crop will not be a bin buster, the recent rally in prices has curtailed U.S. Cotton exports, despite a very weak U.S. Dollar. China, the world’s largest Cotton importer, announced that its Cotton imports fell by 41% in August, compared to 109,663 metric tons last year. This was also much lower that July imports which totaled 131,400 metric tons.

The weak exports have traders fearful that the recent price rally may have run its course, especially as we enter the month of October, which historically has produced seasonal low prices for Cotton due to harvest hedge pressures. Speculators appear to be showing little concern for seasonal trends, as both large and small speculative accounts are holding net-long positions in Cotton futures, according to the most recent Commitment of Traders report. As of September 15th, non-commercial traders were holding a net-long position of 40,190 contracts, up 13,487 for the week. Although technically the current trend is up, there looks to be significant resistance near the 65.00 level that, if tested, could draw additional commercial hedge selling and test the will of bullish speculators to keep buying at the top of the recent price range.

Trading Ideas

Given the strong technical resistance seen near the 65.00 cent area and the upcoming harvest, some traders may wish to explore bearish trading strategies in Cotton. One example might be buying Cotton puts. With December Cotton trading at 64.27, the December 64 puts could be purchased for about 2.68 points, or $1,340 per option. The premium paid is the maximum loss on the trade, and more risk adverse traders may wish to cover the position should the recent highs of 65.47 be taken out on a closing basis.

Technicals

Looking at the daily chart for December Cotton, we notice prices continue to hover above both the 20 and 100-day moving averages. In addition, the 20-day MA has just crossed above the 100-day MA, which is considered a bullish technical signal. However, last Friday’s attempt to test resistance at 65.00 has been met with fresh selling interest. If 65.00 holds, it looks like the Cotton market might be entering a consolidation phase, with support seen near the June lows around the 55.00 area, which could be a test if long liquidation selling occurs.

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