December cotton futures gain in strength

12 Sep '09

5 min read

This means that the cotton trade, with its 7.66 million bales net short position, is currently the main force in the market, since index funds who own the opposite side are only driven by money flows.

The trade operates primarily from a basis long position, which means that futures are being bought when physical cotton gets sold and vice versa. At the moment the trade is a net buyer of futures, because old crop supplies are disappearing faster than new crop is able to replace them. This may explain why the market has been working its way higher over the last couple of weeks and it may also be the reason behind the bullish seasonal pattern at this time of the year.

Since US new crop will not come into the picture for another 5 or 6 weeks, we could see this net buying by the trade continue. Speculators see no reason to step on the short side in any aggressive manner at the moment. They just tried that a couple of weeks ago when technical support was broken, but have since pulled back and covered their shorts. So the path of least resistance seems to be up.

Meanwhile, the AWP/Dec futures spread continues to widen, expanding another 120 points this week to 1437 points. However, even though this spread is getting closer to a workable level, it is currently meaningless because there were only about 100'000 bales of new crop classed as of last week. This will all change in about a month from now when the loan reservoir starts to fill up again. At that point we expect hedge selling to intensify, which could turn the tide in the futures market, provided of course that there are no surprises on the weather or economic fronts.

So where do we go from here? On Friday the USDA issues its latest set of supply and demand numbers and we don't expect to see any major changes. However, given the dynamics discussed above, even a slightly friendly report along with another encouraging export sales figure may be enough to send the market for a retest of the 65 cents level.

Plexus Cotton Limited

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