Based on the CFTC report as of March 19, which includes futures and options, the trade held at net short position of 16.8 million bales (5.1 million long vs. 21.9 million short), whereas speculators were 9.7 million bales net long. Index funds, which are driven by money flows rather than market moves, owned the remaining 7.1 million bales in net longs.

So where do we go from here? After trading down to a low of 86.12 cents earlier this week, the market encountered decent underlying support from mill fixations (May on-call sales were down 1’841 contracts net) and new cash business, as US prices moved back in line with foreign growths.

As long as mills are able and willing to pay prices in the mid-90s for high grades, landed Far East, and as long as the trade carries this massive net short position, we see it difficult for the market to sell off by more than a few cents.

There are twelve weeks remaining until July futures head into the notice period and the market’s direction during that time frame will to a large degree depend on how this big open interest in current crop futures is dealt with. Who will blink first, spec longs or trade shorts? The longs are in a more comfortable position, because they are sitting on a profitable long, which they will continue to ride until the trend reverses. Also, the inversion between July and Dec is working in the specs favor, since they are able to pick up roll gains in case they decided to hang on to their longs.

The trade shorts on the other hand are in a less comfortable spot. Not only is their position nearly twice as big as the spec long – the difference being the index fund long which will simply get rolled forward – but most of these trade shorts form part of basis-long positions (long physicals/short futures) that have not been working too well basis-wise.

The widening inversion between July and December creates some worries in that regard, as it doesn’t make sense to hang on to a physical long position in a market with negative carry. We therefore believe that traders will start to push physical sales, which in turn requires the buying back of futures.

In other words, the more the trade sells on the physical front, the more futures will get bought back, which puts additional pressure on the basis and keeps the futures market well supported. There doesn’t seem to be an easy way out from this trap, unless the specs were for some reason (macroeconomic event) to decide to cash in their longs.

We therefore see continued support in May and July, with the potential for short-covering rallies, while December should start to stall out as grower hedging becomes more widespread.

Plexus Cotton Limited