The 74.00 to 75.00-cent area in December 2008 ICE futures is providing the first significant price resistance of the current rally. The main reason for this is that as futures reached this level, some U.S. growers are able to net near 70.00 cents at the gin, basis a SLM 1-1/16" base grade, which represents an over 20-cent per pound increase from the average 2006/07 farmgate price. As futures moved above 65.00 cents, U.S. domestic trade switched from focusing on CCC loan equity to a Rule 5 basis level, which varies from region to region. For example, today's basis level on Rule 5 terms range from 400 off December futures in the southeastern belt to 833 points off December ICE futures in West Texas.

Very little cotton has been contracted yet, but the 2008/09 basis is now at near 300 to 400 off December 2008. In the Memphis Territory region, for example, growers today could sell forward at 350 off December, Rule 5 terms, with December 2008 at 75.00 cents, which would net 71.50 cents. Growers then face approximately 400 points additional costs in warehouse charges, which would reduce the net to 67.50 cents. The standard practice in the region has warehouses heavily competing for cotton, which suggests growers will be able to obtain a 500 to 600 warehouse rebate. Such a rebate would raise the net to above 71.00 cents on such contracts. Most contracts have a 50 to 100-point premium for grades above the base; thus, cotton could, in theory, be hedged at 72.00 cents. For irrigated growers with an average of 1,000 pounds or more, this would mean an income per acre of 735.00 U.S. dollars per acre. Estimating production costs at approximately 500 to 525 U.S. dollars per acre, with fertilizer costs sharply higher, this meant a profit of approximately 210.00 U.S. dollars per acre. Growers still will receive some government subsidies, but this will depend on which version of 2007 Farm Bill is passed.

The problem for the farmer lies in the continued explosion of grain prices. For example, a wheat/soybean double crop in the Memphis Territory offers more profit. Currently, July 2008 wheat futures are 6.73 U.S. dollars per bushel and November 2008 soybeans are at 9.68 dollars per bushel. Even at this profit level for cotton, soybeans currently offer growers over 324.00 U.S. dollars per acre or more profit for 2008. A wheat and soybean double crop combination increases the profit to 400.00 - 450.00 U.S. dollars or more per acre, which is double that for cotton.

Thus, it appears that December 2008 futures has reached its first significant resistance level; however, the continued rally in soybeans and wheat is undermining its significance.