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NY cotton futures ends volatile week slightly lower
Feb '14
An escalating emerging markets crisis introduced an additional uncertainty factor to an already complex cotton situation this week, resulting in erratic up and down price action as traders tried to figure out the market’s next move. Bulls and bears both have some strong arguments at the moment and it will be interesting to see who will emerge as the stronger side in this tug of war. 
The bullish case is mainly built on a tight statistical situation in current crop and a relatively large trade net short position (10.4 million as of last week) that may get squeezed, similar to what we saw happening a year ago. Although Chinese imports have slowed down this season compared to the previous two, they nonetheless seem strong enough to once again absorb the entire ROW production surplus and possibly more, which means that ROW inventories are likely to remain rather tight as we head into the second half of the season.
After another two weeks of stellar US export sales, during which over 1.0 million running bales were sold, most of which ‘on-call’, our calculations show that unsold US supplies (including beginning stocks) are probably at no more than 4.4 million statistical bales. Since many mills are not well covered for the second and third quarter and with only a limited amount of machine picked cotton available from other origins, it makes perfect sense for the US to price itself out of the market in order to ration remaining supplies. 
This has already happened to a certain degree, at least when looked at from a fixed price point of view, but mills have been trying to outsmart the market by buying on-call, which has the potential to backfire as history has shown. Unfixed on-call sales increased by another 0.4 million bales last week and they now amount to 6.35 million bales overall, of which 5.67 million bales are in current crop. While outstanding fixations dropped by 83’100 bales in March, they increased by 376’400 bales in May and July, as buyers continued to postpone pricing decisions.
Interestingly, even the emerging markets crisis has a bullish component to it, as growers tend to hold on to their crops to protect themselves against a drop in local currency, which limits ready available supplies and can trigger short-covering rallies.

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