Futures trade sideways in reaction to USDA acreage report

02 Jul '11

5 min read

The US export sales report added to the bearish tone, because new sales of 52'500 running bales for the current marketing year were more than offset by cancellations of 184'500 running bales, nearly all of them from China. New crop sales still managed to post a net increase in commitments of 35'200 running bales, despite cancellations in four key markets.

While cancellations are generally seen in a negative light, because they are associated with buyers not wanting or needing the cotton anymore, that's not necessarily true in the case of US cotton. As we have pointed out before, the US is actually overcommitted until new crop arrives and shippers therefore need to lighten up on sales in order to make ends meet. In other words, while other origins may be struggling with their difficult-to-sell inventory, the situation in the US is actually quite tight. That's why there has been a strong taker in the May and July contracts despite the huge inversion. This cotton is actually needed to fill basis-short positions and we expect most of the certified stock to be gone in a few weeks from now.

So where do we go from here? The sentiment is clearly negative at the moment, not just in cotton, but in other commodities as well. There is a lot of uncertainty as to where demand really is in this troubled global economy, which overshadows any supply side issues for now. However, contrary to popular belief the market has not been selling off due to liquidation, but rather because of new short selling by the trade, as merchants and growers were trying to hedge mostly foreign long positions with NY futures. Over the last six weeks, since May 19, open interest in new crop futures (December 11 to July 12) has increased by 54'060 contracts or 5.4 million bales, going from 77'703 to 131'763 contracts.

What worries us in this regard is that the trade is not only short US physical cotton (unshipped US commitments are currently at 7.6 million statistical bales), but it has also built a sizeable short futures position against foreign growths. There are currently more than enough shorts in the US market, be it in cash or futures, which is probably why we have seen the market rebound so strongly from two limit-down moves over the last four sessions. Even though the physical market feels heavy, selling more NY futures short while the Texas crop is burning up may not be the smartest thing to do.

Plexus Cotton Limited

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