NY cotton futures move sideways last week

27 Oct '14

6 min read

The best chance for the market to rally lies with the large spec short position. Although the net spec short position amounts to only 1.7 million bales at this point, outright shorts are at 7.4 million bales if both large and small speculators are considered.

Speculators like to be in trending and momentum driven markets, which was the case when cotton dropped from 85 to 62 cents between early May and late July.

However, since hitting a low of 62.02 on August 1, cotton has been moving mostly sideways. So, it would not come as a surprise if speculators were to cash in their shorts in order to try their luck in a more exciting market.

An exodus by spec shorts could lift prices by several cents, but the trade would most likely be there to sell into strength and therefore keep any breakout attempts short-lived.

Any sustained recovery in cotton prices will have to come from an increase in demand. With cotton prices once again competitive against polyester, it is believed that, this is starting to happen, but it will probably be a slow process and take several years to make an impact considering how large global inventories are.

With western economies struggling at the moment, the charge has to come from Asia. India is currently the bright star as far as economic growth is concerned, but even China looks a lot better than what some of these gloomy headlines reveal.

For example, for the first nine months of the year, real per capita disposable income rose by 8.2%, which bodes well for retail consumption going forward. While China has its problems, mainly due to an overextended real estate market, consumers are still going strong.

China’s economy has grown more than 5-fold in the last 10 years and earlier this month the IMF reported that by one measure, the “Purchasing Power Parity” (PPP), which adjusts GDP for the cost of living, China has now overtaken the US as the largest economy in the world.

The market seems to be frozen in place at the moment, with the March contract currently trading at an 8 cents discount to the A-index, which represents more or less ‘fair value’.

December still carries a small premium given the nearby supply shortage, but that may fade away over the next few weeks since harvest in the US has been making great strides, with no adverse weather in sight anytime soon.

Once the crops are in and sorted out, one may see renewed pressure on cash prices, which in turn would allow the futures market to move lower as well.

India holds the key in this regard, since it has the largest amount of unsold cotton in the ROW and government purchases may be able to hold values stable for a while.

Short-term rallies are possible if speculators were to get out of shorts, but prices will not run far because the trade will be there to cap them. In the longer term the market still looks heavy, although it may take longer than expected for price pressure to materialize. (AR)

Fibre2fashion News Desk - India

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