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NY cotton futures resume upward trend this week
15
Feb '14
From a technical point of view the market did resolve the flag formation that we had mentioned last week and broke out to the upside, which propelled March to a six-month high, while May traded at its best level since April 2012.
 
On the weekly continuation chart the market looks poised to challenge the ‘three peaks’ of 2013, during which the respective spot months at the time reached intraday highs of 93.93 cents (March 15, 2013), 92.58 cents (June 14, 2013) and 93.90 cents (August 16, 2013). The highest close last year by any spot month was registered at 93.40 cents on August 16.
 
The index fund roll period is now behind us, as marked the end of this five-day position transfer from March to May, which means that liquidity is likely to dry up quite significantly from the nearly 50’000 contracts we averaged since the Goldman roll began last Friday. It speaks to the market’s strength that it managed to trend higher during the roll period and it could therefore become quite difficult for the remaining shorts to get out of their positions in the days and weeks ahead, since outright sellers will be hard to find.
 
With index funds sidelined for the next two months, trade shorts will either have to roll forward to May or July and hope for a price break along the way, or they need to find longs willing to give up their position. 
 
The problem is that there is already an imbalance between ‘market driven’ longs and shorts, since according to the latest CFTC report there were just 3.9 million bales spec net longs versus 9.5 million bales trade net shorts. The trade will probably buy some time and continue to kick the can down the road by rolling its net short position forward, but this doesn’t solve the problem and sooner or later there has to be a day of reckoning.
 
Shorts only have three options to get out of their positions: a) buy back the short, which may be difficult to do if there are not enough willing sellers, b) roll the position forward, which will not work past July due to the steep inversion and c) deliver certified stock against the short position.
 
However, finding certified stock to deliver won’t be that easy, for a number of reasons. First of all, according to the latest classing report as of February 6, there we so far only 12.2 million statistical bales of upland cotton produced this season, of which only 61.5 percent or 7.5 million bales are tenderable. Let’s further assume that around 70% of the 3.9 million bales in beginning stocks were also tenderable, which would bring total tenderable supply to around 10.2 million statistical bales.
 
 

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