NY futures rebound amid volatility

23 Jul '10

6 min read

This number is likely to grow quite a bit bigger in August and September before harvest gains momentum. Again, the current situation is quite unusual, because beginning stocks typically more than cover existing commitments at the beginning of the new marketing year. Take last year for example, when we started the season with 6.34 million bales in inventory, while commitments amounted to less than half of that.

It will therefore take a while before new crop arrivals catch up to commitments and for this reason we have October trading at a stiff premium to December. The market believes that there is no way that new crop arrivals will be wasted on the board when October heads into its notice period at the end of September. Judging by inversion of December over March the market is starting to feel the same way about the December notice period. We are not quite sure we agree with that, for several reasons.

First, the crop is relatively early. Second, export sales will begin to taper off after September when major importers like China and Turkey are harvesting their own crops. Third, merchants will want to build carry into the market. Fourth, it does not take that much certified stock to force carry into the market and there is plenty of time. Cotton can be tendered on deliverer's class almost until Christmas. So while we agree with the October inversion, we feel that the Dec/March inversion is an overreaction that will eventually get corrected, although it may take some time.

So where do we go from here? Over the last thirteen sessions December has closed within a tight range between 73 and 75 cents, forming a wedge pattern in the process. Momentum has been lacking in both directions, although we have seen a pickup in turnover this week, with session accelerating to over 21'000 contracts. Sooner or later there will be a breakout from this wedge formation, which will likely generate a strong move of several cents.

At this point we favor a breakout to the upside, because we feel that speculators have exhausted their selling and the trade likes the market at these lower levels. Also, from a fundamental point of view a sell-off doesn't make sense at this juncture given the tight stock situation. Outside markets are turning more positive as well after renewed dollar weakness. The recent increase in spec short positions could provide the catalyst for a rally if buy-stops get triggered. We therefore believe that there is a good chance for a short-term rally into the high 70's, although we don't expect new highs being made on such a move.

Plexus Cotton Limited

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