May 31, 2006
I have suffered mightily with Cotton for the past year. For months, I have been predicting a major bull move and for months I have watched it go nowhere, which, if you have been an options buyer, means you have been losing money...I am a human being and subject to the same fears as everyone in this business; the fear of looking stupid, and more importantly, the fear of losing money...For this reason, I have been somewhat meek of late when it comes to Cotton, even though I have been sitting here, still extremely firm in the belief this incredible three year sideways range in Cotton is going to be followed by a monster bull market. However, as that normal human being, I have been somewhat afraid to stick my neck out and loudly say so...But now I will...
I'll make some strong statements here but will preface them, as ethics require me to do, by saying: No matter how strongly I feel about this market, I may be wrong and if you put you money on this idea, you may lose it all, or if using futures contracts, even more than your original investment...but I do think this is a big, big trade.
Here is my present outlook on this market...
Cotton is CHEAP. Roughly 90+% of the past 30 years have been spent at higher prices.This does not mean it has to go up, but it has been, I believe, building a massive floor for the past three years (see long term chart below)....and the next thing it will do is become expensive...I think Cotton could easily double in price between now and mid-2007. In other words, I see it headed for $1.00 a pound (at least).
Even though you are seeing news about textile mills shutting down in this country, world consumption is hitting record levels, led by (among other factors) Chinese growth, where approximately 40% of the world's textile products are now fabricated. To say China is becoming a larger and larger Cotton importer, is an understatement (see next charts) and I expect them to be no less of a bullish force than we have seen in other commodity markets in recent years.
Note the jump in the last few years...I see no reason why this should change...
The USA provides about 1/3 of the world's exports in Cotton. What happens here is therefore important. Texas produced about 35% of our entire crop last year, and even though they have had some rain recently, it is still bone dry and much of the state (particularly West and South Texas) is still in severe drought...According to most weather services, it is expected to remain so...I am not counting on weather, but statistically, if either drought, hurricanes or whatever were to reduce this year's crop just 10% below trendline yields, current projected ending stocks would probably fall to zero in this country... and the most likely result would be to see prices absolutely skyrocket...
Even without bad weather, Cotton does move....
During the past 20 years, between June 1st and expiration, the December contract has averaged a 16 cent range (from its lowest trade to its highest). This doesn't tell you which way it's going, only that historically, Cotton does move...and it moves a lot. Futures are inherently volatile and with Cotton now having sat here for three years, I LOVE the odds that something big is coming...And with world consumption already projected to outstrip production this year (and this is not even assuming weather problems), and my expectations for fund money to be shifting toward the agricultural sector, I just cannot make a case for lower, or God forbid, even sideways prices. That leaves UP. Last year I was writing that there was no way I could see Cotton prices going lower...and it didn't...but it also didn't go up.
Here are the stats for those past 20 years...
Total Range (high to low, in cents) of December Cotton June 1st to expiration
THIS IS NOT LAST YEAR. I DO NOT SEE ANY WAY THAT COTTON IS EITHER GOING SIDEWAYS OR LOWER FROM HERE.
I am back on it hard. If you were there last year, and got burned, you need to be back on this...If you weren't on it, you are lucky...and probably in psychologically better shape to jump on this.
I see a ton of leverage in December call options. Cotton has a history of just suddenly erupting for no "obvious" reason, and with Texas' weather as a backdrop, and everybody around this market just numb after the past three years, it would not surprise me in the least to see a 10-15 cent rally before we even get to August...
Give me a call...If I'm wrong, you will lose money. If I'm right, I think it's BIG TIME...and this is not something to "wait and see" on...It may be irrelevant but it did rain a little in West Texas yesterday, and after a pretty deep sell-off this morning, Cotton came back to close virtually unchanged...I also note Cotton made new lows last week, then turned right around and is back on its highs for the past six weeks...Both of these are potential signs this market is finally ready to go...and when Cotton goes, it oftentimes comes out of the gate very quickly.
Plain English...Again, this is not last year. Cotton does move....
Here's what December looks like...and the dollars involved with one option possibility....There are obviously a number of ways to go about it, depending on what your risk temperament and profit objectives are.