What are the owners of new crop cotton going to do when Chinese buyers remain in hiding and the market offers less than 400 points carry between Dec 2012 and Dec 2013? Holding on to inventory and wait for better days doesn’t sound like a winning strategy to us.
Why risk losing 10 cents to a potential drop in the market and pay carry on top of that if one can instead sell the cotton, stop the carry and buy a relatively inexpensive call spread to participate in an up move?
Also, a strengthening US dollar and somewhat weaker soybeans and corn prices are not helping the bulls’ case at the moment. We therefore feel that as soon as new crop bales start piling up in warehouses, both the cash and futures market should experience some selling pressure.
The cash market will only be able to absorb a limited amount of supply due to the continued hand-to-mouth buying by mills, which means that most sellers will have to turn to the futures market for price protection.
Plexus Cotton Limited