By Chuck Kowalski
Cotton futures made one of the most remarkable runs in recent history for commodities, but cotton prices have nosedived in the last two months. The cotton market was making headlines almost every day as prices shot above $2 and made record highs.
Almost every news agency was carrying stories of the remarkable rally and the implications of high cotton prices. As we know, commodity markets cannot rally straight up forever and now we are seeing the fallout of an unsustainable rally.
Cotton prices have fallen about 25 percent in the last two months, but the market is still 16 percent higher for the year and 90 percent higher for the last 12 months. That gives you a picture of the magnitude of this rally.
There was a panic rally in cotton, which often happens in commodities when supplies become extremely tight and end users have to scramble to buy supplies. To exacerbate the rally, commodity traders will typically push the market even higher when they smell blood in the water.
Eventually, the price will get to an extreme level where demand gets crushed. It looks like that happened when cotton stretched about $2. The marketplace will have to decide if it can support cotton prices above $2.
That is why extreme prices will often be tested at least twice. If cotton rallies up to that level again and demand dives, then the market will probably roll over hard and it will take some time before it can get there again.
The supply side is still tight for cotton, but demand needs to return. We have already seen some weather problems for the cotton crop and this year's harvest could come in low once again. The season has just begun and we'll see if cotton can form a short-term bottom around $1.50 on the July contract.
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