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News Flash
NY futures continues to drop this week
17 Oct '08
5 min read
Unlike food and energy, which are daily necessities, cotton is a discretionary item that will see it difficult to maintain consumption anywhere near the record levels of recent years if the recession proves to be as severe as currently feared. What makes matters worse is that we are about to harvest another big crop of 114 mio bales at a time when demand is going into shock.
Nobody has a clue as to where world mill use will be from here on forward, but even optimists don't see it at more than 108-110 mio bales annualized at the moment. What this means is that instead of reducing stocks worldwide, we will likely see an increase from already ample levels, which should keep a firm lid on prices in the foreseeable future.
Nevertheless, despite all the doom and gloom in the market, shorts need to be careful when selling the futures market at current levels, because since the beginning of the month we have seen a drop of over 200'000 bales in the certificated stock to currently about 1.2 mio bales.
With the spot month trading in the high 40's it will be nearly impossible for shorts to ship cotton to the board if prompted and if we further consider that tenderable qualities are less plentiful in the coming season, we have the set-up for a short squeeze. The fact that the Dec and March spread has come in during today's early sell-off was a red flag and we would not be surprised to see a further narrowing of this spread in the days ahead.
To make predictions in an erratic market like this is just about impossible, but we do believe that after this massive liquidation is over, many commodities will experience a snap back rally. We therefore need to follow open interest closely for clues on how this liquidation is unfolding and so far we have seen a drop of 50'000 futures contracts since September 15 to currently around 170'000 bales in open interest.
Since a lot of December futures are tied to options, we will probably see a significant drop after December options expire on November 7. Open interest from March onwards is less than 70'000 contracts and we doubt that we will have more than 100'000 - 120'000 contracts remaining after December is all rolled out. The strom may not yet be over, but we are getting close!
Nobody has a clue as to where world mill use will be from here on forward, but even optimists don't see it at more than 108-110 mio bales annualized at the moment. What this means is that instead of reducing stocks worldwide, we will likely see an increase from already ample levels, which should keep a firm lid on prices in the foreseeable future.
Nevertheless, despite all the doom and gloom in the market, shorts need to be careful when selling the futures market at current levels, because since the beginning of the month we have seen a drop of over 200'000 bales in the certificated stock to currently about 1.2 mio bales.
With the spot month trading in the high 40's it will be nearly impossible for shorts to ship cotton to the board if prompted and if we further consider that tenderable qualities are less plentiful in the coming season, we have the set-up for a short squeeze. The fact that the Dec and March spread has come in during today's early sell-off was a red flag and we would not be surprised to see a further narrowing of this spread in the days ahead.
To make predictions in an erratic market like this is just about impossible, but we do believe that after this massive liquidation is over, many commodities will experience a snap back rally. We therefore need to follow open interest closely for clues on how this liquidation is unfolding and so far we have seen a drop of 50'000 futures contracts since September 15 to currently around 170'000 bales in open interest.
Since a lot of December futures are tied to options, we will probably see a significant drop after December options expire on November 7. Open interest from March onwards is less than 70'000 contracts and we doubt that we will have more than 100'000 - 120'000 contracts remaining after December is all rolled out. The strom may not yet be over, but we are getting close!
Plexus Cotton Limited
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