NY cotton futures advance higher this week

11 Oct '14

6 min read

New York futures moved higher this week, with December advancing 209 points to close at 63.94 cents/lb, while March gained 174 points to close at 62.27 cents/lb.

“After posting a low of 60.83 cents two weeks ago, nearby supply worries have since lifted the December contract back into the mid-60s,” the latest Plexus cotton market report reveals.

Spec short covering was the main driver behind the strength in December this week, after an improving chart picture triggered a number of buy stops, while bearish options strategies by the trade hindered March’s ability to rally and thereby fuelled the inversion between the two front months.

The latest CFTC report as of September 30 reveals that large and small speculators were 3.3 million bales net short, which is the largest net short position in over eight years. Outright spec shorts amounted to a massive 8.4 million bales, which is just shy of the record 8.5 million bales set in 2006.

The trade on the other hand carries the smallest net short position in the last ten years at just 2.5 million bales short, which is the result of 8.4 million bales in outright longs and 10.9 million bales in outright shorts.

“This is rather puzzling considering how bearish the trade has been these past few months and a possible explanation is that merchants have been unable to cover their sales in the cash market so far and have therefore resorted to using long futures and options to protect against their commitments, while the short side consists of hedged grower positions that have yet to be sold,” the report says.

The futures market is a ‘zero sum’ game, which means that for every seller there has to be a buyer and vice versa. Therefore, speculators and the trade can’t both be going short at the same time.

Index Funds are the only net long at the moment with a position of 5.8 million bales, but since they are a passive form of investment they only buy or sell futures based on money flows or due to rebalancing. In other words, if the trade or the specs want to go short, they will have to find buyers amongst themselves.

Speculators have been a much more aggressive force since this bear market began in early May, selling around 9.6 million bales net since then, while the trade has bought 10.2 million bales net, with Index Funds making up the difference.

There are plenty of reasons why the trade has been such a strong net buyer in the futures market over the last five months. But in general, speculators seem to be the more disciplined bunch when it comes to recognizing and following trends, while the trade often tries to pick bottoms and tops, only to get hurt in the process.

While the specs sector is reaping the spoils of this bear market, producers have seen their profit potential evaporate as the market has dipped below the cost of production.

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