Sterling Terrell

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Don’t Hate the Futures. Hate the Fundamentals.

Don’t Hate the Futures. Hate the Fundamentals.

If you don’t know Dave Ramsey, he is a public financial advisor known popularly as a bestselling author, radio host, and public speaker. I love Dave Ramsey. He is a good guy. He has great family values and a no-nonsense guide to personal finance (although I do not follow exactly his investing philosophy).

Ramsey summarizes his basic plan in what he calls, “Seven Baby Steps,” as follows: Start a $1,000 emergency fund; Pay off all debt using the debt snowball (smallest balances first); Save three to six months of expenses; Invest 15 percent household income in Roth IRA’s and pre-tax retirement; Save for children’s college; Pay off your home early; And finally, build wealth and give.

The point of all of those steps, however, is not really about building wealth or money. It’s about freedom. Debt weighs you down. Wealth, on the other hand, gives you options.

Having options in every aspect of life is a wonderful feeling. Being backed into a corner is not.

With that simple principle in mind, what marketing options do cotton producers have?

We are all fairly familiar with them. There’s cash sale, joining a co-op or marketing pool, forward contracts, futures contracts, and options?

There are some among us who actually dislike some of these options. My advice is to them is simple. No matter what the price of cotton is, don’t blame speculators, hedgers, or futures in general by saying “I wish we didn’t have a futures market for cotton. We would all be better off.”

That theory simply doesn’t hold water. What if futures contracts, and options on them, didn’t exist?

Well, first of all, there would be two fewer marketing options – along with the fact that forward contracts would not have a public and transparent price on which to be based. (For Example: 300 off Dec, 31-3-36 or better, no remarks). Come harvest, the cotton price would, seemingly, fall out of the air – like the price of pecans or peanuts, among others, does today.

The disappearing of a futures market has in fact happened before, albeit with a different commodity. In that instance, prices fell and struggling producers lobbied to get rid of the futures market. They even passed a law on it that still stands today!

In the U.S., starting in 1958 and continuing to this very day, it is illegal to trade futures on… onions!

U.S. Code>Title 7>Chapter 1> § 13-1 states:

(a) No contract for the sale of motion picture box office receipts (or any index, measure, value, or data related to such receipts) or onions for future delivery shall be made on or subject to the rules of any board of trade in the United States. The terms used in this section shall have the same meaning as when used in this chapter.

(b) Any person who shall violate the provisions of this section shall be deemed guilty of a misdemeanor and upon conviction thereof be fined not more than $5,000.

Academics such as Professor David Jacks of Simon Fraser University have shown evidence that a futures market for a given commodity actually causes lower price volatility in that commodity.

If the futures markets give us more marketing options, a basis for forward contracts, and lower volatility, don’t get down on them. That price you see is simply a result of the buying and selling between people at mutually agreed upon prices using the rules that governments have set before them.

Be upset at the fundamentals – but don’t kill the market that is the messenger.

You would be worse off without it.

First published by Cotton Grower.

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Filed Under: PotpourriTagged With: #Cotton, #Futures

Cotton Snapshot – For Week Ending: 10/31/2014

Cotton Snapshot – For Week Ending: 10/31/2014

Chart:  barchart.com

Notes
ICE cotton dollar prices for Dec. rose just over 80 points this week as prices pushed just shy of 64.50.  U.S. certified stocks fell to 15,926 while net export sales were at 185,400 RB.  Open interest for December stands at 93,540 with March open interest at 76,027. Conditions Report stated 48% of crop is good to excellent, compared to 47% last week, and 44% last year.  18% of the crop is poor to very poor, compared to 19% last week, and 24% this week last year.  Managed money is net long. Technical traders see support around 63.50 with resistance around 65.50.  The trend is up.

Price

December is at:  64.45
March is at:  62.92

Stocks and Sales

ICE Certified Cotton Stocks = 15,926.          15,928 last week
US Net Upland Export Sales = 185,400.       78,800 last week
(Indonesia was the big buyer at 32,900.)

Current World Balance Sheet (2014/2015)

Beginning Stocks:  101.31  (million 480 lb. bales)
Production:  119.37
Supply:  220.68
Mill Use:  113.68
Ending Stocks:  107.11
Ending Stocks/Mill Use Ratio:  94.22%

Current China Balance Sheet (2014/2015)
Beginning Stocks:  62.71 (million 480 lb. bales)
Production:  30.50
Imports:  7.00
Supply:  100.21
Mill Use:  38.00
Ending Stocks:  62.16
Ending Stocks/Mill Use Ratio:  163.58%

Current USA Balance Sheet (2014/2015)

Beginning Stocks:  2.45 (million 480 lb. bales)
Production:  16.26
Exports:  10.00
Supply:  18.71
Mill Use:  3.8
Ending Stocks:  4.9
Ending Stocks/Mill Use Ratio:  128.95%

Commitments of Traders

Producer / Merchant
  • Long:  38,401  (Contracts)
  • Short:  72,505
Swap Dealers

  • Long:  52,578
  • Short:  8,576
Managed Money

  • Long:  46,076
  • Short:  32,566
Other Reportables

  • Long: 18,263
  • Short:  39,387

General View

Bullish to neutral

*This is for informational purposes only, and not a recommendation to buy or sell.
There is substantial risk of loss to futures and options trading. 
Past performance may not be indicative of future results. 
One should carefully consider their financial suitability prior to trading futures or options.

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Filed Under: Not BooksTagged With: #TheCottonClubLetter

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