NY futures continue to advance this week

17 Jul '09

6 min read

With this disparity between spec longs and trade shorts in mind, we need to ask ourselves what these two groups are likely to do next. The trade has been motivated to increase its short position by the fact that foreign prices did not follow the spike in New York, which has prompted traders to buy available foreign supplies and hedge them with futures. There may also have been some selling against existing on-call sales, as higher futures prices allowed merchants to lock in fairly attractive fixed prices. However, in both instances there will be an offsetting futures transaction once the basis-long position gets sold to mills or when mills fix existing on-call sales.

Here is why we believe this mismatch between traditional spec and trade positions is of significance. For specs to close out their position they would only have to sell 20'000 contracts net, but if the trade wanted to go square it would have to buy five times that amount. The trade's position therefore represents a much stronger force on the buy side than the specs' position represents selling pressure. In the case of a correction, specs may sell out of their longs, but the trade would likely be there in greater numbers to absorb the selling. We therefore see the market very well supported on dips.

Last week's USDA report was at first interpreted as bearish by the market because US exports for the 2009/10 crop were taken down by 0.6 to 10.2 million bales. However, upon further reflection traders may have figured out that this export number was not lowered due to a lack of demand, but because there is simply less cotton available next season.

Beginning stocks were lowered to just 6.0 million bales due to the faster pace of exports in the current marketing year and even if we get a crop of 13.25 million bales, the US cannot afford to export much more than 10.2 million unless it lets ending stocks drop below 5.6 million bales. If the US were to export the same amount as this season, it would end up with stocks of just 2.5 million bales at the end of July 2010.

Today's export sales number came in stronger than expected at a combined 130'000 running bales for Upland and Pima, with shipments at 237'100 running bales. Commitments for the current season are now at 14.4 million statistical bales, whereof 12.5 million have so far been shipped. New crop sales total about 1.1 million bales at this point, but if we include another 1.1 million bales that will be carried in (14.4 in sales minus expected shipments of 13.3 at end of July), we will start the new marketing year with already 2.2 million bales of exports on the books.

So where do we go from here? Speculators have been able to push this market higher with minimal effort, mainly because the trade seems to have limited room to add to its already substantial net short position. The breakout above resistance may attract additional spec interest, which would be enough to keep the trend going. Even though a correction is possible at any moment, we believe that the market will be very well supported for the reasons explained above. We don't feel that speculators will face any major pressure from the trade until new crop starts moving in volume and this is still at least two months down the road.

Plexus Cotton Limited

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