Over the last seven sessions open interest jumped by nearly 12’000 contracts, with March accounting for most of the increase with over 11’000 contracts.
Since speculators typically operate in the more liquid spot month, we have to assume that it was primarily the trade that added long and short positions in March. While additional shorts may be tied to grower hedging and additional on-call business, new longs may be related to a ‘weather play’.
With harvest in the Northern Hemisphere about to gain momentum, traders are paying close attention to the latest weather developments. After an irregular growing season, which set most of the US crop 2-3 weeks back and possibly affected fiber characteristics, the last thing this crop needs is a rainy and cold fall.
Unfortunately the long-range weather forecast points in that direction and that has traders nervous. Not only are the tropics getting more active, but frontal boundaries are expected to trigger a number of storms from Texas to the Southeast over the coming days. Although certain areas would welcome some rain, they don’t want to see a pattern of recurring storm systems develop.
There is not much margin for error this year since the US crop is relatively small to begin with - the third lowest in 24 seasons to be exact. Only the 2008/09 and 2009/10 seasons saw smaller outputs at 12.8 and 12.2 million bales, respectively. In other words, all it takes is some adverse weather to create a tight premium-grade situation.
The first 203’000 bales that have been classed so far - all from Texas - have yielded only 46.7 percent in tenderable grades. Although this percentage is likely to rise over the course of the season, the pool of tenderable grades is not going to be very large. At 60% it would amount to just 7.4 million bales out of an Upland crop of 12.3 million bales!
This makes the market vulnerable to a squeeze down the road and it also has the potential to wreak havoc with basis levels, especially if foreign growths like India or West Africa continue to pressure physical prices. If anything goes wrong with this small US crop, it could hurt the many basis-long positions and unfixed on-call sales out there.
By being short the futures market, traders all over the globe essentially bet on a positive outcome for the US crop and any weather related trouble could therefore ignite a short-covering rally. According to the latest CFTC report, the outright trade short position still amounted to 16.3 million bales (net short of 11.6 million bales), while unfixed on-call sales were at 5.9 million bales.
US export sales didn’t amount to much last week, as only 111’100 running bales of Upland and Pima cotton found a home. However, we believe that the uncertainty surrounding the US crop has a lot to do with this modest sales number, as shippers are not willing to commit too many additional high grades at this point. For the season total commitments now amount to 4.1 million statistical bales, whereof 1.2 million have so far been shipped.
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