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July cotton futures resemble casino than hedging vehicle

30 Jun '12
4 min read

However, the most supportive factor for cotton prices going forward is the fact that food prices keep rising. Corn, soybeans and wheat all had impressive rallies over the last couple of weeks as large parts of the US are in the grip of an extreme heat wave that is deteriorating crop conditions.

Tomorrow’s USDA planted acreage report will give the market something to chew on and the consensus number is at around 12.7 million acres, which compares to last year’s planted acreage of 14.74 million acres. Although this year’s acreage is quite a bit smaller, fewer acres will be abandoned due to much improved conditions in West Texas, which should result in a larger crop overall.

So where do we go from here? The big story at the moment is the heat wave in the US, which is causing a rally in grains and soybeans. Despite its bearish balance sheet, cotton doesn’t exist in a vacuum and needs to concern itself with defending its territory going forward.

Although it is too late to impact the acreage of Northern Hemisphere crops, with the exception of India perhaps, we need to remember that the market is a discounting mechanism that projects into the future. As long as competing crops (soybeans and corn) hold at current levels, we see it difficult for cotton to concede further ground. On the other hand there is still a lot of producer hedging to be done, which should cap any attempt to move beyond the mid-70s. We therefore continue to see the market in a trading range between 65 and 75 cents in the foreseeable future.

Plexus Cotton Limited

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