The July contract continued to frustrate trade shorts this week, as it moved to within 41 points of its recent high of 93.61 cents, set on March 28. For the last 35 sessions, since March 6, July has closed no lower than 89.86 and no higher than 93.61 cents, a relatively tight band of just 375 points.
A couple of weeks ago it looked liked the market was finally starting to reverse to the downside, but there was plenty of scale down trade buying to absorb the 1.5 million bales in net selling by the spec sector over the last three weeks. Obviously some large spec traders have closed out their positions in the cotton market during that time frame, as long accounts have dropped from 133 to currently just 104.
However, with the market being able to regain its composure, a technical sell-off has been averted for now and we have to assume that the remaining spec long is in strong hands. This may pose a problem for the still large contingent of basis-longs and unfixed on-call sales. We estimate that the trade short in July is made up of about 6.0-6.5 million bales in basis-long positions (US, Australian, South American, African and Indian origins), 3 million bales in unfixed on-call sales and perhaps a million or so in outright shorts.
Paradoxically, a bearish price outlook for cash prices going forward may actually act in support of July futures. As traders fear a drop in the cash market, they have a greater sense of urgency to get out of existing physical positions, which requires them to buy back their short futures. If this occurs in an illiquid market environment, in which specs are not prepared to sell their remaining longs, then prices will have to rise in search of willing sellers. So far the trade has been reluctant to get out of its upside down basis-long, but time is starting to run out and traders are getting increasingly more nervous about this situation.
If last week’s US export sales are any indication, traders will use every opportunity to lighten up on their remaining current crop positions. For the week that ended on April 17, a total of 152’000 running bales of Upland and Pima cotton were committed, of which 132’300 bales were for shipment in the next three months. Although China was the largest buyer at 112’500 bales, there were a total of 17 different markets participating, which shows that there is still broad-based demand for nearby US cotton.
Total commitments for the current season now amount to around 10.1 million statistical bales, of which 8.0 million have so far been shipped. We keep hearing some talk about potential cancellations of remaining commitments in an effort to free up tenderable grades for delivery, but we feel that this may be more wishful thinking than anything rooted in reality. There have been some cancellations almost every week since January, but that hasn’t stopped net sales from increasing quite substantially. More importantly, shipments have been excellent in recent weeks, signaling that mills actually do want their cotton.