NY cotton future continues to push higher

27 Apr '09

6 min read

Speculators, who have a fairly low involvement in the market at this point, really hold the key. They have been severely bruised and battered in this financial disaster, but they seem to be regrouping and may become more active in commodity markets again. This morning a bullish option strategy of some size was being linked to a prominent hedge fund that also played a big role in the cotton rally a little over a year ago. And as you can see from the above figures, it will not take much buying to get the short in trouble.

So we have the expectation that the various market participants will be more inclined to buy than to sell in the foreseeable future, we have a technical picture is strengthening and we also have some supportive news on the fundamental side. Not only have US exports been surprisingly strong in recent months, but according to the US attaché in Beijing demand for US cotton will remain strong as we head into next season.

The attaché report, dated April 15, estimates that China will import 13.8 mio bales in the 2009/10 season, up from 7.44 mio bales in the current season. The report cites "a sizable decline in domestic production and a rebound in cotton use in response to an anticipated recovery of demand for textile and apparel products" as the reasons for higher imports. Most traders, including ourselves, are taking these kinds of estimates with a grain of salt, although they will certainly linger in our minds as a "what if".

While it matches the latest USDA production numbers for China, it is much more optimistic on consumption and sees it at 46.39 mio bales versus a loss-adjusted 43.0 mio bales of the USDA. However, the biggest discrepancy is in the ending stock number for this season, where the attaché shows just 12.6 mio bales compared to the USDA's 19.7 mio bales, a discrepancy of 7.1 mio bales. It just shows how difficult it is to get a good grip on what is going on in China, but the recent strength in the domestic market could be a hint that business is not quite as bad as previously feared.

So where do we go from here? The market has gone up 10 cents with relative ease, but now it will have to prove itself. Resistance from the cash market is getting stronger at these levels as mills are not readily accepting these higher prices while supplies are still ample.

It will take some momentum to carry the market to the next level, but as we have shown in the above numbers, the shorts are fairly vulnerable at this point and it may not take that much new buying to force the issue.

The fact that prominent hedge funds are sniffing around in the cotton market is a sign for caution. We all remember what happened the last time around. Although we are still leaning towards a range-bound market at the moment, albeit at a somewhat higher level, the set-up for an explosive break out is certainly in place.

Plexus Cotton Limited

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