NY futures had another mixed week, but this time it was July that was up by 368 points to close at 84.48 cents, while December dropped 70 points to close at 78.72 cents.
The July contract, which had its First Notice Day, is going out on a strong note, reflecting the extremely tight statistical situation we are currently in. The fact that the majority owner of the certified stock is not only keeping what's left of his inventory, but is adding more by owning around 70% of the remaining longs in the July contract, is certainly a sign of strength.
Since there is only a limited amount of open contracts remaining in July, it is not likely that we will see any last minute fireworks. After accounting for the 476 notices that were issued, there were only 1'901 contracts or 190'100 bales open in the July contract as of this morning and this number has probably been reduced further during session. Because the sole issuer of these notices has previously taken delivery of over 2'900 contracts, no one seems to be caught on the wrong foot entering this delivery period and it is now simply a matter of some certified stock changing ownership.
We believe that there is only one large Merchant in control of most of the 490'639 bales of certified stock that remain at this point and since there is no incentive to hang on to this cotton due to the steep inversion to December, it is probable that the entire lot will disappear over the next couple of months. It would indeed be a great side effect of this bull market to see the entire certified stock being disposed of, since it has accumulated a bunch of undesirable bales over the years.
The same is true for the cash market, as merchants have been busy pushing their remaining inventories out the door in light of the inversion that exists in the physical market as well. The forward A-index, which calculated at 87.10 cents, is substantially lower than the current crop A-index, which was last quoted at 95.70 cents on June 22 and has since been discontinued due to a lack of suitable offers. Unless the case can be made that hanging on to a position will yield a higher price a few weeks from now, it makes more sense to get rid of the position in order to stop the carry.
The US serves as a prime example. Although there can't be much old crop cotton left for sale, US shippers are not holding out for potentially higher prices and are cleaning house before new crop starts hitting the gins. Last week's US export sales were once again quite impressive at 84'400 running bales for prompt shipment and 174'400 running bales for shipment August onwards. Total sales for the current season now amount to 13.5 million statistical bales, whereof 10.4 million have so far been exported, while commitments for the coming season currently stand at 2.2 million statistical bales.
The market seems to be able to 'save' itself into new crop, where supplies will initially be plentiful with the arrival of the Northern Hemisphere harvest. However, if the current statistical outlook for the coming season proves to be more or less accurate, we are likely to find ourselves in a similar or worse predicament by next spring or summer. Although there is not much volume traded yet in the July and December 2011 contracts, there already exists an inversion of 400 points between the two and we get the feeling that the next edition of the July/Dec spread may not end as benign as this year.
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