Morning Futures Roundup

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The Cure for High Prices


 Fundamentals

The old trading adage "The cure for high prices is high prices" may accurately describe the Cotton futures market this coming season, as global production in Cotton is expected to increase sharply, as record high cash prices has producers expanding acreage dedicated to so called "white gold".

There has been a major divergence in the price behavior between old crop and new crop cotton futures, as extremely tight global supplies has trigged several consecutive "limit-up" price moves in the old crop May futures, while new crop December futures appear to be trying to put in a "top" on the daily charts.

Some private forecasters are calling for a 15% increase in U.S. Cotton acreage this season, as prices are now high enough to bring in additional acreage for the production of Cotton. Some of the acreage may come from such unlikely places as southern Kansas, where normally Wheat is the major crop. Globally, world Cotton acreage is expected to increase by nearly 7% to 89 million acres, according to the International Cotton Advisory Committee. World Cotton production is expected to increase by nearly 10% for the 2011 season.

Although we should see global Cotton supplies increasing late this year, it will do little to deal with the current supply concerns, as Cotton export demand continues to look strong despite record prices. So we may see a further widening of the old crop/new crop spread in the coming months, especially if the USDA Prospective Plantings report, due out on March 31st shows even more acreage dedicated for Cotton production than currently is expected.


 Technical Notes

Looking at the daily chart for May Cotton, we notice what appears to be a near-term top forming on the daily chart. After making a new all-time high price on Monday, prices failed to hold the day's gains and closed near the low of the day. This "reversal" cumulated in a limit-down session on Tuesday, as weak longs headed to the exits. Trading volume has started to fall the past several sessions, which could be a sign that the recent move to new-highs was caused by short-covering and not fresh longs entering the market.

The 14-day RSI is also displaying a bearish divergence, which could be a sign that a price correction may be near. The recent high of 219.70 remains resistance for the May contract, with near-term support seen at the 20-day moving average, currently near the 192.30 area. Chart support is seen at the February 25th low of 175.13



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