We were quite surprised to see the huge jump in open interest this morning, which revealed that this rally was fueled by new spec buying rather than trade short covering. Total open interest increased by a massive 11’186 to 186’221 contracts yesterday, with December leading the way by adding 8’373 lots. The 154’489 open interest in December is the highest for this date in five years, with the previous four years ranging between 96’901 and 133’762 lots.
This means that we currently have a large contingent of spec longs (estimated at around 8.5 million bales net) facing off against an even larger block of trade shorts (estimated at 15.5 million bales net), with Index Funds making up the difference with their 7.0 million bales net long. However, Index Funds are going to remain passive until we get to the roll period at the end of October/early November.
With the next major notice period still over three months away (October with its 247 contracts in open interest doesn’t really count), this battle between spec longs and trade shorts is currently as much about money as it is about cotton.
It wouldn’t be the first time for the cotton trade to be taken hostage by spec raiders with deep pockets! Even though the current trade net short position is not quite as large as the 23.8 million net short of early 2008, it still hurts paying margin calls in the neighborhood of 80 million dollars for every cent the market advances. This is particularly painful since there is currently not much cash business to offset these losses, as most of the cotton these futures and options are hedging has yet to be produced. The US crop is still in the field and Southern Hemisphere crops have yet to be planted!
This begs the question whether enough credit lines are available to service additional margin calls against collateral that only exists on paper so far? Or could it be that at least some of these shorts are going to be forced to cover if the market were to advance any further?
US export sales amounted to 99’400 running bales of Upland and Pima last week, with a total of 18 markets participating in the buying. Meanwhile the pace of shipments increased to 177’500 running bales, probably due to the fact that nearly 600’000 bales of de-certified cotton has become available for shipment.
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