Check the dollar, then trade. Remember back in the new old days, say from 1999 to 2007, cotton traded mostly around 50c, with brief swings to 85c and 30c. The dollar in that period traded from 82c to 120c, and a ballpark average or median would be about 100. Right where it is today. We mention this as there a profound and widely accepted theory that row crop commodity prices today cannot, will not, and most certainly are forbidden to trade back at levels prior to 2007. Call this the “new plateau theory.” This idea holds that with the doubling and tripling of commodity prices in the last few years, and with rising inputs that often jumped 15% in a year, it is therefore impossible for prices to move below lows established in the most recent few years. These lows are $7.75 soy, $3.10 corn, and $4.25 wheat.
For now those lows do seem extreme but they are well below current prices. With the dollar back into the same trading range as that of the early 2000s, we have to wonder if ag markets can maintain a level today that does offer slight profits, or is the dollar telling us that the “new plateau theory” is shot to hell. Cotton is already into the price band of the period mentioned.
Varner View
With the dollar back at the same level of 1999 and 2003, owning any commodity is a tough go. However, cotton is much lower relative to cost of production than its row crop kin, and thus has a more solid foundation by which to own anything. The trade we keep looking at in a purely theoretical sense is owning cotton and shorting soy. Potential on the long side for cotton is not much, but downside potential for soy could be huge.
Technicals
Today is a 34 count from the Jan low, and next Tuesday is a 55 count from the Dec high. A seasonal high is due now, but so far there is nothing on the chart to indicate this year will be normal. Some highs have occurred late in Mar, so there is time for a modest rally. Resistance at 6600 will be difficult to overcome in a broad sideways trend. The 22 month cycle low, a very reliable timing event, has been put into place via double lows at 5705 and 5785. This low was due ideally in Oct 2014, and it occurred actually in Nov and Jan. There is also a 27.5 month cycle, not as reliable as the 22 month, but worth a look. Chart shows the most recent 4 cycles, broken into 123 weeks for clarity. The lows shown are Nov 06, Mar 09, July 11, and Nov 13. The next cycle is due Mar 2016.
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