Published On: Wed, Feb 15th, 2017

Cotton downside beckons on US supply boost

InstaForex

US farmers are going to increase cotton sowings by close to 1,000,000 acres this year, as they have been encouraged by the 27.7% gain in prices since mid-March last year.

The National Cotton Council said in its regular farm survey that US growers will plant 11.02 million acres of the fibre this spring, a rise of 9.4% year on year. This would represent a full recovery from the 8.58 million acre coverage seen in2015 that was the second lowest on data going back over 100 years.

The price has been driven by firm demand for US exports, amid a squeeze on Indian supplies.

Dr Jody Campiche, the NCC’s Vice-President for Economics and Policy Analysis said:

“…History has shown that US farmers respond to relative prices when making planting decisions…” 

The survey that reflected data collected in December said that farmers took great encouragement in the fact that cotton futures averaged 70 cents per pound, which is higher than levels in December 2015.

Source: www.investing.com, Spotlight Ideas 

The chart above captures the price path since November 2013 and shows that the current price of cotton is finding it hard work to break and hold ground above the 50% Fibonacci resistance at US Cents 75.375/lb.

This is reflected in the highly negative near-term technical sentiment as from one minute to five hours the inclination is for market players to be strong sellers.

I acknowledge that the sentiment on the longer horizon is positive, however, the word from the farm is that the estimate of 1,000,000 more acres may be low baring the actual increase in acreage. With prices at their best levels in almost one year there is a strong temptation for farmers to divert once assigned land back in favour of cotton.

According to the US Department of Agriculture, if the survey were conducted now the based on the prevailing cotton-competing crop price ratios the new acreage should be higher.

Given that there has been such an aggressive rise, and that there appears little more supportive news, to keep the momentum cotton would need to hear that that another major exporter, such as China was limiting sales. Therefore, I am inclined to look at selling the May contract (CTK7) which has in recent days eclipsed the volume of the March (CTH7).

Cotton 5-year chart: 

Source: Spotlight Ideas

Management and risk:

Parameters:Cotton May 2017 CTK7.

Entry:Sell at 77.47 15:43 GMT.

Targets:75.00 … 72.90 … 68.00 … 66.75.

Time horizon: Short-term.

— Edited by

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