NY cotton futures rally & regain lost ground

08 Jun '13

5 min read

In this regard it is no surprise that July has once again been gaining ground on December, with the carry shrinking from nearly 300 to just 50 points this week. July is now drumming to its own beat, supported by rapidly depleting stocks, while December is kept in check by the promise of a new crop and the threat of a policy shift in China next season.

Sure, there is the certified stock of currently 536’000 bales (including bales under review), which under normal circumstances should be forcing carry into the market. But we need to remember that the certified stock forms part of the paltry 1.5 million bales of US cotton that remain for sale, which are not expected to last for more than a couple of months. In other words, the market doesn’t really need carry if there is nothing left to carry!

Last night West Texas finally received some much-needed rain, with most stations around Lubbock receiving between 0.5 and 2.0 inches. This brings a lot of the already written off dryland acreage back into play, although one rain event is not going to make a crop yet. While the topsoil may have gotten wet enough for seed to sprout, the roots won’t find much subsoil moisture to dig in and are therefore vulnerable to hot and dry conditions during summer, unless more rain follows soon.

So where do we go from here? July shorts had a chance to get out at 80 cents and mills got an opportunity to cover summer shipments, but only a small number of traders seem to have taken advantage of the recent price break. There were still nearly 90’000 contracts open in July this morning, although the Goldman roll will bring this number down considerably over the next five sessions.

Anyone still short July beyond next week is asking for trouble in our opinion, unless they own certified stock to back up their bets. We have a feeling that the market won’t be kind to procrastinators this time around and that we could see some last minute fireworks in July!

December may be a different story, as growers are likely to engage in a lot of hedging between 85 and 90 cents, which should keep a lid on new crop in the foreseeable future. However, if China continues to tighten the balance sheet in the rest of the world, new crop prices may eventually have to ration demand by moving higher.

Plexus Cotton Limited

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