Despite the high price level last week, there were still 15 different markets pursuing US cotton, which tells us that available supplies must be quite scarce around the globe. The fierce pace of shipments seems to confirm this notion, as no less than 573’200 running bales were exported during the first 15 days of August.
So where do we go from here? Although specs have liquidated a decent amount of longs over the past few sessions, open interest nevertheless remains fairly high. We estimate that specs (large and small) still carry a net long of around 6.5-7.0 million bales, whereas the trade probably has a 13.5-14.0 million bales net short, with Index Funds accounting for the difference.
As mills buy and fix additional supplies, more of these trade shorts get lifted, which spec longs will welcome as an opportunity to lighten up on their longs. For now we expect this process to be fairly orderly, with the market probably not straying too far from current levels.
In the longer run a lot will depend on how the US crop turns out, both quantity and quality wise. Then there is the uncertainty regarding China’s price support and import policy, which could yield some surprises.
However, before getting too negative on China, we need to remember that the seasonal production surplus in the ROW (rest of the world) is only expected to amount to 9.53 million bales, according to the latest USDA report, so that’s all China needs to absorb in order to prevent ROW stocks from rising.
Plexus Cotton Limited