NY futures resume their uptrend this week

12 Feb '11

5 min read

The strength we have been seeing in the physical market seems to support this stockpiling theory, since there is no evidence of any significant demand destruction yet. US export sales continue at a brisk pace despite the high price level, with 326'500 running bales of Upland and Pima for both marketing years finding a home last week. Once again there were over 20 different markets participating in the buying. According to our calculation the US is now nearing the point of being completely sold out of current crop cotton.

The A-index (209.75 cents) and the CC-Index (around 199 cents) continue to trend higher as well, reflecting strong fundamentals in the physical market. Meanwhile, the September futures contract at the Zhengzhou Futures Exchange is trading at around 232 cents, which is over a dollar higher than the December contract in New York. While several weeks ago many traders were still of the opinion that current crop prices would sooner or later have to collapse, it now looks like new crop prices might be trading up to current crop levels.

Last Friday the NCC announced planting intentions of 12.5 million acres, up 14% from last season. Even if this figure grows to over 13 million acres by planting time, we have to allow for greater abandonment and lower yields due to the ongoing La Nina pattern, which is likely to cause growers some headaches this spring and summer. In other words, despite increased plantings the US crop may not reach more than 20 million bales next season.

The world's largest cotton producer, China, may also find it difficult to boost its output by any significant margin. China's eastern agricultural region is currently experiencing one of its worst droughts in decades and the Chinese leadership may therefore incentivize the production of food crops, which could come at the expense of cotton.

So where do we go from here? As of last Friday unfixed on-call sales in current crop still amounted to 7.36 million bales, of which 1.6 million were on March alone. As time is running out for these mills and any other short that may have missed the chance to get out, there is likely to be some last-minute panic short-covering that could propel the market even higher.

There was definitely some evidence of that, as March closed up more than 1100 points synthetically. In order for the market to reverse, hedge funds and other speculators on the long side would have to be willing to sell, which is not likely as long as the market displays such strong bullish signals (strong trend, high volume and increasing open interest). Maybe a big drop in open interest as a result of the March options expiration could trigger some profit taking, but we wouldn't bet on it just yet.

Plexus Cotton Limited

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