We cannot remember a time when traditional price relationships have been more out of kilter than over the past couple of weeks. We typically have the A-index at a premium of around 5-7 cents above the spot futures contract and it rarely ever exceeds 10 cents. However, recently this spread has been as wide as 16 cents on a couple of occasions, as cash prices have held very steady even when NY futures were showing some weakness.
Today the futures market narrowed this spread considerably and based on December's synthetic close of nearly 119 cents we are now once again getting closer to the traditional basis between the A-index and spot futures. The A-index stood at 124.60 cents this morning, although it is likely to bounce higher tomorrow. Nevertheless, we wouldn't be surprised to see NY futures go from being 'undervalued' in regards to cash prices to overtaking them over the next few sessions as a result of this explosive move.
Another price relationship that has gone awry lately is the one between the New York and Zhengzhou futures markets. What used to be a fairly consistent 25-30 cents spread (Zhengzhou over), has widened to about twice as much today, since the nearby futures month at the ZCE in China closed at 177 cents.
So where do we go from here? It is anybody's guess at what level this blow-off move will exhaust itself. It could be within just a few cents or it may be another ten, twenty cents from here. It will to a large degree depend on the staying power of the shorts. Based on how much money they have already spent over the last three months, we can't imagine that there is a whole lot left to defend short positions. Therefore, the higher the market goes, the more these shorts are getting forced out.
It will be interesting to see how the cash market reacts over the next few days. Will cash prices finally encounter some resistance now that the Northern Hemisphere crop is moving in or will they continue to lead the way higher? If cash prices were to settle down, it would eventually cap the futures market as well, because once December becomes pricey relative to cash AND has a 600-point premium to March, it will invariably attract cotton to the board. Once the panic blows over, we expect to see cash and futures prices realign themselves to a more traditional basis, although we may have a very volatile up and down move ahead of us before we get there.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
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