NY futures come under pressure

05 Jun '10

5 min read

The Cotlook reported that China's commercial stocks were still at 3.0 million tons at the end of April, which would be significantly higher than last season. If that were true then China should have more than enough cotton to make it to new crop, considering that there are still around 1.4 million tons in the Reserve as well. What seems odd though is that Chinese prices remain near record levels. Both the CNCE and the Zhengzhou futures markets are still at around 120 cents, while the CC Index is at 117 cents. One thing that hasn't changed over the years is that no one seems to have a firm grip on Chinese statistics.

So where do we go from here? Speculators are the force that tips the scales. Index funds work from a permanent net long position, while the trade is typically operating from a futures net short. When specs are net sellers and the trade is not keen in buying the same amount on the other end, or at least not until prices become cheaper, then the market will be forced lower. The opposite has been the case when specs were net buyers and the trade struggled to add more shorts.
Although the trade needs to cover its remaining July shorts over the next three weeks, it is replacing some of these shorts in December due to the fact that the US crop looks very promising at the moment. Growers are keen to sell near 80 cents, while mills don't want to pay these forward prices.

We believe that trade support will be there in July from current levels on down, but if speculators continue to liquidate in greater numbers or intend to short commodities, then the market could face more downward pressure. The certified stock could still come into play as an element of surprise if buyers can be found, although that is a big IF at the moment. Even though the market may look attractive at current levels, we prefer not to buy it on this kind of weakness and shall wait for a trend reversal first.

Plexus Cotton Limited

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