While the upside looks contained, there is also reason to believe that prices won't fall apart anytime soon. First of all, it will take until early next year to get enough cotton into the pipeline to relieve the bottleneck that currently exists and to rebuild stocks to more comfortable levels. Then there are several outside factors that act in support of cotton prices, like strong grain prices, the high cost of energy and the loss of the US dollar's purchasing power.
This week December corn rallied to over US$ 7.40 per bushel and even December 2012 corn prices are already over US$ 6.50 per bushel. The same goes for soybeans, where current crop prices are near US$ 14.00 per bushel and November 2012 soybeans are at US$ 13.40 per bushel. This means that cotton has its work cut out if it wants to defend its current acreage next season.
So where do we go from here? We still believe that a sideways trend makes the most sense going forward. There is currently no reason to believe that prices will run away to the upside and there are also plenty of factors that offer support. The market seems to think so as well, because volatility readings have been dropping steadily, with December now below 39% volatility and March, May and July 2012 between 34 and 36%. However, while cotton fundamentals may predict an uneventful season, we need to be vigilant of developments on the economic and financial front. The lingering debt problems in Europe and the US have the potential to turn the financial markets upside down at any time, which could send commodities on another rollercoaster ride.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
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