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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....
Bill Rhyne
866-578-1001
770-425-7241
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.
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