We feel that the current bull market deserves even more respect than the one in 2008, because two years ago it was primarily a margin squeeze that fueled the market, while this time around we may have a margin issue coupled with a very tight fundamental situation. To have a strong taker for nearly 600'000 bales of certified stock despite an inverted market is something we didn't see two years ago and it may just be a prelude for what's to come in the May and July notice periods. There are plenty of rumors regarding the fate of the certified stock and it is certainly possible that a good part of this cotton has already been committed overseas.
Adding fuel to the fire was a story out of China stating that the National Bureau of Statistics has the crop at just 6.4 million tons or around 29.3 million bales. This may prompt the USDA to lower its current forecast of 32.0 million bales in one of its next reports. The NBS also reported yarn output at nearly 24 million tons for 2009, up by 12.7 percent compared to 2008. Stories like these portend strong Chinese cotton imports for the remainder of the season.
So where do we go from here? We still feel there is upside potential on May and July since the specs want to be long, the trade will be a net buyer, mills will have to fix and there is not much cotton left to hedge. On Dec, we feel that the upside is more limited as a move above 75.00 is likely to attract some hedging of new crop. Therefore, we feel that the backwardation has the potential to increase over the next few weeks and we would advocate shorting May and July through long puts rather than short futures.