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Limit up in cotton trading

22 Feb '08
4 min read

Soybeans at $14.00 a bushel implies that cotton prices would have to rise to $1.25 to $1.40 a pound for a farmer to be indifferent between growing cotton and soybeans. (The historic indifference curve would equate ten dollar soybeans to one dollar cotton.)

While country prices for cotton firmed this week in both India and China, the world's two largest producing and consuming countries, the two primary impetuses for this week's limit up move in New York was likely tied to textile mill price fixations that seemingly had to be done by the week's end. We have commented several times about the historic disparity between the large volume of call sales (representing the need to buy futures) versus the small level of call purchases (representing the need to sell futures).

Additionally, the limit up move this week was also importantly influenced by technical indicators in the market. Wednesday's close suggested a price breakout to the upside. Thus, Thursday's market opening was hit by massive fund buying in the May contract. Speculative funds have, with their very deep pockets of money; bought in to the idea that cotton will catch on to the bull ride seen in the other commodities.

Economists have been forecasting a significant increase in cotton prices since September 2007. While such an increase is now in its infancy, with the nearby contract up 13 cents since early October, remember we economists are never wrong, we just change our opinions. Said other way, we just change the facts, not our minds. The market continues higher. Yet, the bigger move will be in the 2008-09 marketing year contract months.

Growers may want to look at selling some December $1.00 (one dollar) calls. If you are wrong then you have fixed the price of your cotton for a dollar a pound...and remember, economists are never wrong.

O. A. Cleveland

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