Rally in cotton quite impressive

05 Jan '08

3 min read

The trade on the other hand continued to sell aggressively into this spec buying and has boosted its outright short position to around 17.1 mio bales as of last Friday, and after the jump in open interest yesterday we can assume that the trade is probably close to 18.0 mio bales short by now, which would not be far off its highest ever short position of 18.8 mio bales.

Despite all this heavy trade selling, which amounted to over three million bales in added shorts during December, the market has been able to push higher and we wonder how much more the trade is willing or able to throw at the short side. With a short position already of around 18.0 mio bales, there cannot be that much more cotton left to be hedged.

When we look at how much is unsold in the US, we come up with around 16 mio bales at this point. On top of that there are some foreign crops that merchants have hedged with US futures, most prominently Brazilian for several crop years forward. Then there are around 6.6 mio bales of on-call sales which merchants may 'fix' by selling futures.

But even if nearly all of these positions were ultimately to be hedged with futures, it would not leave that much more to be sold against. Our guess is 3 or 4 million bales, 5 million tops. The point here is that the trade does not have unlimited resources and reasons to keep selling futures against the flood of spec buying that is entering the market.

For now this trade selling may be able to keep the market in check, but let's not forget that as we move forward, the pile of cotton to be hedged will get smaller with every new sale and mill fixation.

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Plexus Cotton Limited

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