Cotton regains interest of commodity funds & money managers

04 May '09

4 min read

Speculators appeared to be the dominant buyers of cotton futures once again and at times in a near reckless manor. Open interest in our market is just now beginning to increase as money managers and commodity funds are increasingly attracted back to cotton futures that are still perceived to be historically cheap.

Until this last week, at least half of the strength came from short covering. The new buying is thought to be coming from the funds who have deep pockets and will not easily be shaken of their new long positions. The combination of a strong technical picture and minimal commercial hedging allowed cotton to take the path of least resistance. As of a week ago, the spec/hedge report showed specs to be net long to the tune of only 5.7 percent of the open interest.

However, just one month ago, the spec community was net short four percent the cotton market, so it would seem that they have really just started turning their positions around. Open interest is only about 60% of what it was during the March 2008 explosion. Futures closed significantly higher for the week, which didn't seem possible on Monday amidst the swine flu scare. However just as has been the case lately, the early week dip was an opportunity for money managers to hope on board.

Speculators and funds were aggressive buyers on Friday, following through on the bullish technical signal created Wednesday and Thursday. Cotton futures set new six month highs Friday. Trading at the highest level since Halloween, July cotton ended 285 higher for the day at 5720 and up 450 points for the week. New crop December, ended the period 244 higher at 5990 for the day and 352 for the week This week the popular July/Dec spread closed in from 374 points in to 267 points.

Until two weeks ago there were 465 points between the two months and basically in the area that it had been for months. The perception is that regardless of large inventories of unsold cotton, we could actually end the crop year with tight supplies of better grade cotton. Export sales had another fantastic week. Combined sales of upland and Pima for both crops years were 269,000 bales.

As we have commented each week, US cotton refuses to be priced out of the market regardless of the seemingly endless stream of spec buying. However, this could be changing. This past month the A Index, which is the average of the five cheapest growths, rose 655 points. It is interesting to note that at the bottom of the market six weeks ago, US were the two cheapest growths in the A Index. But As of Friday morning they were no longer in the index which is now composed of the three African growths, Greek and Indian.

Fundamentally this should be a sign that our weeks of great exports are coming to an end. However, none of this seems makes any difference to the market bulls have the shorts on the ropes. During the month of April the AWP rose 812 points and the Marketing Loan Gain, or LDP ofcourse, dropped a like amount. Since the AWP climb started on March 20th, roughly 5.7 million bales have been redeemed from the loan. As the AWP climbed, overhead resistance from hedge selling rose as well. For the past year and a half many mills have found hand to mouth buying to be most satisfactory.

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