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January 25, 2007
Buy Cotton
I have been recommending Cotton forever...and I am sick of this
idea but I am NOT about to give up on it here. Futures ARE
inherently volatile and Cotton is no exception. As
this market is now far into the longest consolidation it has had
in at least the past 30 years, recent developments lead me to
believe the odds for a big bull move have gone sky high for
2007.
I can tell you that:
1. Exports have been dismal to start the year (bearish).
2.The USDA just raised its estimates for the recently harvested
US and Chinese crops (bearish).
3. The USDA just raised its estimates for world cotton supply
and ending stocks for this season (bearish).
4. The USDA just lowered its estimates for US exports and
Chinese imports (bearish).
In other words, there is no immediate statistical
reason to buy Cotton....Which is part of why I am doing so
(AGAIN). In this business, you buy markets
(especially if they are a true world staple) when there is no
reason to do so...
I can also tell you:
1. World demand for cotton basically moves higher
each year simply as a function of population growth
and the expanding global economy. In fact, world
cotton consumption has increased 23% just in the past three
years...
2. World production generally has to keep increasing to meet
that demand. When it doesn't is when you get bull markets.
3. Corn, Wheat and Soybeans have all rallied
dramatically during the past year (Corn and Wheat to 10 year
highs), and with Cotton prices still in the cellar, I
have little doubt Cotton will "lose" acreage worldwide to these
crops in the coming year.
As a result, I cannot imagine
Cotton doing anything but going up significantly in the coming
year...ESPECIALLY after it has been just laying here at the low
end of its historical price range for a full THREE years.
Here is a graph that kind of explains the basics of the Cotton
market as I see it going forward...
The next chart should help make clear why one might expect
world Cotton acreage to decline...With Corn only higher than
this once in history, and Cotton at lower levels than 95% of the
past 30 years, doesn't it make sense to expect a significant
percentage of acreage, worldwide, to be switching out of cotton?
And Wheat, by the way, looks virtually identical to Corn...
Again, throw into the mix that Cotton has been
consolidating for 3 years (longer than anywhere on this chart)
and I can't help but see this as a hell of a bet...This
IS a market that is typically a big mover....Especially a this
time of year...
On the table below are the total ranges for
every July Cotton contract, for the past 30 years, between
January 31st (now) and the expiration of the contract in July...By
total range, I refer to how much of a swing there is between the
lowest trade and the highest trade of July Cotton...Note that
in the past 30 years, there is only one year in which
the range was less than 10 cents.
Total Range July Cotton in Cents Per Pound - January 31st
to Expiration
The bottom line is 30 years of
data say this contract should go DECIDEDLY one way or the
other...I may be dead wrong, but with world demand expanding
when at the same time US and World acreage are almost certain to
contract, I don't see how prices could possibly be headed
lower...
Here is the current July contract I am positioning in....
Buy Low?
I think the 33 year chart of Cotton shown below really says it
all...You can easily see how definitively volatile this market
usually is...and how definitively sideways it has been going
back to 2004...And how low it is relative to the past three
decades. This chart really is the perspective that fires me up
about this trade...
COTTON IS VOLATILE AND I FIRMLY
BELIEVE IT'S NOT
GOING TO BE SITTING HERE
IN THE 50'S COME YEAR END 2007. I ABSOLUTELY THINK YOU BUY IT
NOW, WHILE IT'S STILL DEAD AND OPTIONS ARE WHAT I CAN ONLY CALL
"DIRT CHEAP".
50 cent rallies do not happen overnight
(they can easily take a year or two) but the point I am
trying to make on the chart following is, when cotton does
go up, it tends to do so in almost vertical fashion...and in
a big way...
If you have already been in this trade with me, and have spent
months watching options go to zero as Cotton went nowhere, you
will hate this idea...But the fact remains, as commodity trades
go, if you were walking up to the table for the first time with
a fresh "wad", this IS a smart position to be taking. Cotton is,
in my opinion, absolutely the most undervalued commodity on the
board (especially in today's world), and, as evidenced by the
chart above, it IS a market that does make some VERY big
moves...And the next six months have repeatedly been a time of
the year when it does so...This may be a total loser,
but if it's not...if Cotton is coming out of this giant
consolidation on the upside, I can't help but think the return
has the potential to be a big multiple.
Is now the time to be on it?...Who the hell knows?...If I did, I
wouldn't have been sitting on it for the past 18 months...In the
end, this stuff is unpredictable and all you can do really do is
make educated guesses, put your money on the table, cross your
fingers and see what happens...
Give me a call if you want to know more...Other markets follow
sometime soon...
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
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