NY cotton futures continue to edge higher this week

02 Aug '08

5 min read

With all these speculative groups cutting long positions, it follows that the cotton trade had to be on the other side by covering a decent amount of its net short position. Indeed, since the end of February the trade has gone from a record 23.8 mio bales net short position to an 11.6 mio bales net short as of last week, a reduction of more than fifty percent.

But since this position is now down to a fairly manageable level, it is unlikely that the trade rushes in and buys back substantial chunks of these shorts unless there is a very good reason to do so, like a problem in one of the major crops or signs that demand is much stronger than currently believed.

With neither being the case at the moment, the trade will only buy back futures against physical sales. At the same time there is no compelling reason for the trade to add additional shorts either, because a) the price is relatively low in absolute terms and b) because there is not much new crop cotton being forward-contracted at the moment that would require a short hedge.

Therefore, we have somewhat of a stalemate at the moment, with both traders and speculators reluctant to step out of their comfort zone, which has caused the market to settle into this rather boring trading range that we have been in for nearly four weeks now.

So what could wake the market up? The biggest hope in the short term remains with an improving technical picture, as December has been able to string together a mini uptrend over the last seven sessions, posting the highest close since July 3rd this week. In doing so it has approached the upper end of the 70.78 - 75.33 range, which it has been in since early July, and we are beginning to see some technical indicators turn up.

With the 7-day EMA (exponential moving average) likely to cross over the 21-day EMA either tomorrow or Monday, we should see some spec short covering get triggered, which could lift the market out of this sideways trend and attract additional spec buying. In a thinly traded market this can quickly translate into a 3 to 5 cents move to the upside, at which time we would expect the trade to emerge as a decent seller again.

In the longer term the market depends entirely on the how the supply/demand situation takes shape, but unless we see bigger than expected yields or there is more demand destruction than anticipated, the current fundamentals seem to be supportive of higher prices next season.

Plexus Cotton Limited

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