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NY cotton futures continue to advance this week
May '14
Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents resistance area on Tuesday. In doing so, July broke out of an eight-week trading range, during which it had closed between 89.86 and 93.61 cents for 37 consecutive sessions.
The strong move was confirmed by decent trading volume and a huge jump in July open interest, which increased by 9’696 to 118’644 contracts in just two sessions. While specs added new longs, the trade was obviously willing to commit to an even larger net short position. This is rather surprising to us, considering that the short side has not been too kind to the trade in recent months and we therefore thought that traders would adhere to the old Will Rogers quote, which warns that “if you find yourself in a hole, stop digging!”
Although cash prices have held steady this week, the renewed strength in New York has put additional pressure on the basis, adding to the woes of traders who still have to unload sizeable amounts of basis-long positions. There is simply no easy way out of this trap at the moment, especially since the July/Dec inversion has once again widened to nearly 1100 points.
US export sales for the week ending April 24 were about as expected at 37’600 running bales for the current marketing year and 48’900 running bales for August onwards shipment. Although there were 13 markets on the buyers list, China was by far the most dominant at 59’600 running bales. Shipments continued to be impressive at 228’400 running bales, reducing the amount of outstanding sales to just 1.84 million running bales, which is 1.05 million bales less than a year ago. 
The strength of Chinese imports continues to take the trade by surprise! Armed with new quotas, China is currently on track to import at least 13.0-13.5 million bales by the end of July, thereby handily beating the recently revised USDA estimate of 12.0 million bales. In doing so, China is once again squeezing remaining ROW supplies to very tight levels and this situation might not change by much in 2014/15. 
Let’s assume that the ROW produces a surplus of 12 million bales next season, which is still a big IF considering the current lack of rain in West Texas and a potentially weaker than expected Indian monsoon. If China were to import 8-10 million bales next season, which now seems likely, then ROW stocks would only recover marginally from the much depleted levels at the end of this summer. Since some of the recently issued processing quotas as well as additional sliding scale quotas earned through current Reserve auctions will only be used later this year, they will count against 2014/15 statistics and provide a solid plateau for Chinese imports next season. 

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