NY Cotton Futures able to halt decline this week

08 Aug '14

5 min read

We therefore feel that the market’s bearish outlook may find itself at odds with growers’ resistance to let their cotton go, not just in China, but in India, the US and many other origins as well. Also, let’s not forget that there are support mechanisms in place, like the US loan program or the Indian MSP, which will help growers to buy some time. While we don’t doubt that large crops may eventually force prices lower, we wouldn’t be surprised to see some of the early short positions get squeezed.

US export sales for the week ending July 31 amounted to 250,100 running bales net, with China’s 73,600 running bales leading a pack of 19 different buyers. The final export figure for the 2013/14-season amounts to 10.57 million statistical bales, which is slightly higher than the latest USDA estimate of 10.50 million bales. For the current marketing year, i.e. the 2014/15-season, total commitment currently amount to 4.6 million statistical bales, which compares to 3.4 million bales a year ago.

So where do we go from here? We feel that the futures market is currently boxed in by strong support in the low-60s and massive overhead resistance in the high-60s/low70s. The support comes from growers’ resistance to sell and the possibility of Chinese imports outside the quota system, while overhead resistance results from the trade’s need to increase its price protection in the futures and options market. The drop in volatility this week seems to indicate that the market has started to discount the above scenario.

With the certified stock disappearing (just 112,000 bales as of this morning), we still feel that December is a dangerous month to be short at these low levels. The brunt of this bear market will probably not be felt until early 2015 when growers start running out of money or patience and for this reason we believe that March, May and July offer a much safer bet for short hedgers.

Plexus Cotton limited

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