Cotton sitting at the crossroads

On Monday cotton got a real bid, when the USDA revised lower both yield and harvested acres.

That lead to some follow through buying on Tuesday, pushing the soft commodity up 1.8%, it's best finish in 17 months.

Interestingly world cotton carryout is actually at a record high. Much of the world supply however is based out of China, which many consider to not necessarily be available to the world market.

China also had it's own crop downgraded, based on some 'unfavourable' weather.

The proportion of the US crop rated "good" or "excellent" fell two points over the week to 43%, with particular falls in Alabama, South Carolina and Tennessee.

From our perspective, the current Dec13/Mar14 spread, held up reasonably well given the strong buying. I often like to use the spread as almost a leading indicator of price action for the underlying. 

Quite often when we see a strong outright and the spread not following suit, it can mean there is room for a potential reversal.