We’ve said for weeks that it seemed the surprising and persistent strength in old crop cotton was the only logical reason for new crop strength in the face of huge global stocks. USDA added to the bearish case with last Friday’s global supply/demand balance sheet for 2014/15 showing still further global stocks build-up. Even if you don’t count China’s stocks at all the planet is sitting on a 6-7-month supply when a 3-month supply is considered adequate buffer against weather problems for new crop.
This week’s clear topping action began when the old-crop/new-crop spread in futures began to tighten via weakness in old crop. But now the December contract shows a significant downside reversal in the low 80s. These prices actually represent a near “worst case” scenario for 2014/15 yield-wise and that means substantially more downside risk than upside potential. Thus, our advice to have half your expected production priced; unusually aggressive for this early in the crop year.