NY cotton futures steadily moves higher this week

Tropical storm “Karen” is on track to make landfall somewhere along the Alabama coast on Saturday, bringing gusty winds and possibly heavy downpours to the US Southeast, all the way from Alabama to North Carolina. Unfortunately the system seems to be a slow mover and may get mixed up with a cold front moving in from the Rockies, which has the potential to produce quite a bit of rain.

On the other side of the globe we have Typhoon “Fitow”, which is forecast to make landfall in China’s Zhejiang Province on Sunday, bringing potentially torrential rainfall to cotton areas in Jiangsu, Anhui, Henan and Shandong. Some models predict 4-8 inches of rain near the coast and 2-4 inches inland, which may impact both yield and quality.

While crops can handle an isolated rain event, the market is afraid that a recurring pattern of wet and cool conditions could make it difficult to get these already late Northern Hemisphere crops off the field and it may also reduce the availability of high grades. That’s why the market is currently pricing in a ‘weather premium’, which will likely be there for another four to six weeks.

Another interesting feature this week has been the big increase in open interest, as a total of 23’298 new longs and shorts were added over the last six sessions. Total open interest amounted to 205’751 contracts as of this morning, the highest level since the failed breakout attempt seven weeks ago, when it reached 214’378 contracts on August 19.

While new shorts are probably linked to hedge selling by the trade (Brazil, Australia, on-call sales), we have some difficulty explaining the sudden jump in new longs. We can’t see any compelling technical reasons that would have prompted spec longs to enter the market in big numbers.

Trade short covering doesn’t seem to be a likely cause either, since that would have led to a decline in open interest, although it is possible that some of these shorts bought bullish options strategies to safeguard their positions in view of all these weather worries.