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NY futures rebound amid volatility
23
Jul '10
NY futures rebounded this week, with December advancing 124 points to close at 74.71 cents. It has not been easy for traders to make sense of the cotton market recently. Not only are there conflicting signals, but one also needs to constantly be aware of the crosscurrents in these volatile outside markets. While the general direction of the cotton market has been down since the middle of June, inversions and the lack of carry on the board have been contradicting this seemingly bearish trend.

The Oct/Dec (486 points) and even the Dec/March (60 points) inversions make some sense, since the certified stock has all but disappeared (75'782 bales as of morning) and the pipeline won't start to fill up again until new crop arrives in volume. But the lack of carry exists beyond that since there is just 168 points available for the four months between March and July 2011, despite expectations of a 19 million bales US crop.

Even further into the future there is another inversion of 361 points between July 2011 and December 2011. So while the directional trend seems to be telling us that there will be plenty of cotton to pressure prices, the spreads behave like the opposite were true.

This dichotomy may have something to do with the fact that speculators and index funds were responsible for the market's recent decline by selling 2.7 million bales net between June 22 and July 13. Since nearly all of their positions are in the December contract, which accounts for over 70 percent of open interest, they can influence the nearby contract but play a lesser role in the spreads, which is primarily the trade's domain.

From what we can tell the trade is not bearish, at least not from current levels on down. We can't remember a season when inventories were tighter and even though world production is expected to rise considerably in the coming season, it can barely catch up to consumption, which means that stock levels will probably remain tight. To see over a million bales of certified stock disappear since June 3rd and to be treated to these stellar export sales reports week after week is a clear sign that we are dealing with an unusual situation this season.

Last week the US sold another 382'000 running bales of Upland and Pima, of which 92'700 running bales were for prompt shipment. This brings total commitments for this season to 14.1 million statistical bales, of which 11.5 million bales have so far been exported. The 2.6 million bales in outstanding sales for the current marketing year, which has just 16 days to go, is about a million bales higher than last season. We therefore estimate that around 1.8 million will get carried over into the coming season, where they will be added to the 3.3 million statistical bales that have already been sold for 2010/11.

In other words, we will start the coming season with at least 5.1 million bales of commitments on the books, plus whatever will be sold until the end of this month. The number will probably be closer to 5.7 million bales by August 1. Since only 2.9 million bales will be left in inventory at the end of July according to the USDA, we will start the new season roughly 2.8 million bales "short", meaning that the bales needed to meet these existing commitments have yet to be produced.

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