NY cotton futures continues to move higher

01 Sep '14

5 min read

Total commitments for the season now amount to 5.2 million statistical bales, of which just 0.3 million bales have so far been exported.

The market seemed to once again have a negative reaction to these export sales, although what is not understood is why; moderate pace of sales is still mainly due to a lack of offers and not the other way around.

The tight supply situation applies to other origins as well, such as Brazil or India, where local prices have been quite firm lately.

Old crop inventories seem to be limited just about everywhere and although new crop is going to be harvested soon, growers are in no hurry to part with their cotton.

It is therefore the market’s job to flush these supplies out and that will only happen via more attractive prices, at least in the near future.

It is difficult for traders to gauge the price of cotton at the moment, because there are wide variations between origins as well as shipping months.

Take China for example, where the ZCE September contract trades at around 17,205 Yuan/ton (126 cents/lb), whereas the ZCE January contract sits at just 14,355 Yuan/ton or over 20 cents/lb less.

If NY futures had an actively traded September contract, it would most likely trade at a sizable inversion as well.

Since this price discount going forward has existed for a while, merchants and mills did not want to hold more cotton than absolutely necessary. In fact, merchants were quite happy to build a physical short position, expecting prices to fall over time.

This may explain why the trade net short position of 3.3 million bales is the lowest in at least eight years.

While growers did not sell as much cash cotton or futures as in previous seasons, merchants pushed short cash sales in view of the expected bear market, some of which were hedged with long futures. What needs to happen now is for merchants to get cotton out of grower hands.

December is currently trading about 450 points above its low, trying to lure some much needed cotton into a depleted pipeline.

Specs have covered some shorts and established a few new longs based on an improving chart, but momentum is not nearly as strong as we would like it to be.

Nevertheless, given the acute shortage of cotton nearby, don’t expect much downside pressure at the moment and feel that the market needs to create more of an incentive to entice growers to sell.

So, it can be safely expected for the market to slowly grind higher, as this counter trend rally is likely to continue until harvest pressure finally sets in.

Fibre2fashion News Desk - India

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