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NY futures resume uptrend this week
08
Mar '14
After meandering sideways for the past six weeks, unable to generate much momentum, the market finally exploded to the upside on heavy fund buying. Volume was brisk with over 23’400 lots trading in May alone and we expect to see a large spike in open interest tomorrow.
 
The market seems poised to challenge last year’s ‘three peaks’ on the weekly chart, which loom at 93.93, 92.58 and 93.90 cents. A move above this important resistance area would likely trigger additional fund buying and could make life quite miserable for the many trade shorts that remain. 
 
Cotton was in good company though, as Ag commodities continued to rally this week, with hedge funds covering shorts and/or adding new longs in near frantic fashion. Coffee saw the most spectacular gains, having exploded from 115 cents/lb to over 200 cents/lb in a matter of just five weeks on supply concerns, but cocoa, sugar, wheat, soybeans, and corn all had phenomenal gains as well since late January, often to the detriment of commercial traders who in many cases continue to hold bearish views.
 
The most recent CFTC report showed that large specs carried the biggest net long position across 13 Ag commodities since the summer of 2012, when drought in the US farm belt propelled many of these commodities to record highs. However, unlike two years ago the fundamentals are not quite as bullish, although there are notable exceptions such as coffee or lean hogs for example.
 
We believe that it is the large amount of liquidity in the financial system and a lack of attractive investment alternatives that drives these managed funds into the commodity arena.
 
It is no coincidence that many of these commodities started to take off in late January, after the emerging market scare sent tens of billions of dollars back to the US and Europe. With stocks getting pricey in the US after two years of phenomenal gains and with the bond market looking uninviting with interest rates as low as they are, fund managers in search of asset diversification and higher returns apparently decided to make a play in Ag commodities. 
 
While hedge funds are piling into the cotton market, the trade isn’t really in a position to put up a good fight at this point. Cotton futures are not really that overextended yet in regards to the physical market, as remaining cash supplies in the US and other ROW origins are tight, while mills still need to cover plenty of cotton in the months ahead.
 
Even if the futures market continued to rally and leaves cash prices behind, it is doubtful that there would be a large amount of tenderable grades left for delivery, considering that this year’s crop produced only around 7.5 million bales of certifiable cotton. 

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