Impressive turn in cotton market

19 Sep '09

6 min read

The lack of US cotton in the loan is certainly one of the reasons why the market was allowed to stair-step higher with relative easy. Even though the AWP/Dec futures spread amounted to a very inviting 1763 points today (1643 points based on next week's AWP), it was impossibly for the trade to take advantage of it because there is hardly any new crop cotton available yet. As of September 10 there were only 136'000 bales classed so far and even though this number will steadily increase from now on, it will probably take another 4 or 5 weeks before the bulk of the crop gets harvested. This means that at the moment there is simply not that much hedge selling being done, although merchants recently went outside the US to find some cotton and they bought a decent amount in Uzbekistan, India and some African origins. Most of that cotton has probably been hedged judging by the increase in trade shorts.

So where do we go from here? Timing is everything and right now the trade simply doesn't have the ammunition to hold these buoyant speculators at bay. If it were the middle of November, the market would probably have no chance to break above the 65 cents level, but at this point in time we wonder how many more shorts the trade is able generate. Sure, merchants may consider to buy some more foreign cotton and lock it into a basis-long position, but that has its dangers too if the weather in the US continues to wreak havoc. In that case there is a risk for the basis to weaken, because a lack of tenderable grades could force the futures market to drum to its own beat.

From a technical point of view the market seems poised to challenge the August 13 high of 65.47. If it manages to close above that, we could see a quick move towards 68-70 cents on buy stops and new spec buying. Looking at the weekly chart, if October closes above 62.10 cents it would mark the highest weekly close in over a year. On the other hand, if the market fails to take out the 65.00 to 65.50 area over the next few days, we could see a quick pullback towards 60 cents as the market may have to regroup before launching another attempt. For shorts, the US crop and the associated hedge selling cannot arrive fast enough!

Plexus Cotton Limited

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