Mills replaces all December fixations with new on-call biz

05 Dec '09

5 min read

There is simply a lack of keen sellers at the moment. Hedge funds and traditional speculators, who are 6.6 million bales net long, are impressed by the price action in the cotton market and many of them subscribe to a longer-term bullish outlook on commodities, based on factors like a weakening dollar, inflation fears and growing consumer demand in emerging markets. It is hard to argue with their rationale and cotton in the mid-70s is still relatively inexpensive from a historical perspective. Index funds, who currently own a net long position of around 8.1 million bales, are also more likely to increase their holdings than cash out, for the same reasons as above.

On the other side we have the trade, which has further increased its net futures short position to 14.7 million bales as of November 24th. These shorts are primarily hedging physical long positions of various origins or are used to lock in a fixed price on on-call sales. To put this position in perspective, it currently amounts to around six months of global exports! The trade's futures short position follows some seasonal tendencies and is usually the largest around the time of harvest, when physical long positions get established by merchants. After the turn of the year it gradually declines as these basis-long positions are being unwound during spring and summer. It is therefore difficult to imagine that the trade's futures short will grow much bigger from current levels. In all likelihood the trade is going to become a net buyer of futures over the coming months, at least in current crop.

So where do we go from here? The market seems to be in the process of consolidating the price jump that was brought about by the Dec/March spread. Attempts to sell off have so far been lacking in volume and conviction. As explained above, there seem to be more potential buyers than sellers and this portends a continuation of the bullish trend. Outside markets continue to act in support of commodities, with the dollar showing further weakness and stock markets holding steady at the moment. Barring any unforeseen events in the world's financial markets, we expect current crop futures to climb above 80 cents in the months ahead. New crop is a different story, as this higher price level will attract more acres next season and prompt growers to forward contract some of their intended plantings. We therefore expect current crop to invert over new crop in the not too distant future.

Plexus Cotton Limited

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