NY futures explode to the upside this week

05 Mar '11

5 min read

For May and July longs the market couldn't behave any better. Not only is the price moving higher, but also the spread to new crop keeps widening. This means that the longs can sit back, enjoy the ride and at the opportune time they can roll their position into new crop at a huge discount. There is no pressure whatsoever for them to sell, because their exit strategy (rolling to December) is looking better every day. For the shorts the opposite is true! Their clock is ticking louder and louder, because in a little more than 3 months they have to be out of all their May and July positions. Rolling is not an option and there is no deliverable cotton to save their day either.

Although some analysts and press reports keep blaming speculators for this runaway bull market, we believe that the trade has plenty of participation in it as well. By rushing out to buy all available cash cotton early in the season while leaving the price on it open, the trade has fueled this historic bull market. First by setting the cash market on fire and now by facilitating an explosive move in the futures market via this still massive unfixed on-call position. As of last Friday there were still 5.8 million bales to be fixed on May and July. While buying on-call may work quite well in a market that has ample supply, it can turn into a powerful bullish catalyst in a tight market like we had this season.

So where do we go from here? Current crop futures have now clearly divorced themselves from the rest of the board and are trading in their own bubble. Shorts in May and July are finding themselves in a liquidity trap from which it is costly to escape. Until the sizeable trade net short position in current crop futures and options has been greatly reduced, the market is likely to trade higher.

Intermittent profit taking by longs may provide temporary relief, but the primary trend continues to point higher. New crop is a different story! Enthusiasm among growers is big and global acreage is likely to expand even beyond the most optimistic estimates. If the weather cooperates, global production may therefore surpass the old record of 121.8 million bales by a wide margin, possibly by as much as 10 million bales. A lot of things need to go right for this to happen, but if they do, new crop futures may prove to be too expensive. Let's not forget that until October last year the highest the futures market had ever traded was 117 cents, while December is currently trading nearly ten cents above that level.

Plexus Cotton Limited

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