May '09
After the market had rallied about 20 cents in just two months, racing from 40 to 60 cents without much of a pause, it finally encountered some resistance this week. Since making a high of 61.67 cents on Tuesday, the market has given back almost three cents and this time it doesn't look like buyers are rushing in as hastily as on previous dips.
Just when the trade with its 9.5 million bales net short position (CFTC report of May 5) seemed at risk of getting overrun by speculative buying, it was new spec shorts that came to the trade's rescue. The latest ICE spec/hedge report showed that outright spec shorts reversed course by adding 3'044 contracts last week, thereby counterbalancing the buying by outright spec longs, which added 5'532 lots. This was a notable change from previous weeks when the two camps were teaming up on the buy side, with spec longs establishing new positions and spec shorts covering existing ones.
Some commentators are mistaken in saying that profit-taking by spec longs led to this set-back, because open interest has been rising for 13 straight sessions, increasing by over 19'000 contracts to nearly 138'000 contracts as of this morning. This confirms that it was new shorts getting in rather than existing longs pulling out that led to this dip. The fact that stock and commodity markets were starting to pull back may have emboldened new shorts to take short-term positions in this technically overbought market.
That the rally was losing steam became evident on Tuesday, after a friendly USDA report failed to generate additional upside momentum and the market closed 145 points below the high of that day. Speaking of the USDA report, it showed a fairly constructive set of numbers for the 2009/10 marketing year, with world consumption expected at 111.0 million bales (adjusted for the ominous "loss" factor) and world production at 106.5 million bales.
If the USDA were correct with its prediction, it would finally lead to a sizeable drop in world ending stocks to just 57.8 million bales, after inventories were reported between 62.0 and 62.8 million bales for the last four seasons.
The recent sharp recovery in cotton prices has certainly been helped by the fact that governments in China, India and Central Asia were willing to take control of sizeable amounts of inventory and temporarily withdraw it from the marketplace. In China the USDA estimates that while total ending stocks are not much different from a year ago, 12.5 million bales have shifted to the state reserve since last fall.
India's government agencies too still have several million bales in inventory and they may continue their high support price policy next season, while Central Asian ending stocks will increase by about 1.4 million bales this season as governments are reluctant to let go of their crops below a certain price level.
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