NY futures bounce back this week

08 Apr '11

5 min read

NY futures rebounded this week, with May rallying 790 points to close at 208.22 cents, while December gained 544 points to close at 132.50 cents.

This week's volatile and somewhat unexpected move showed just how dangerous it is to trade current crop futures at the moment. Just when it seemed that May and July were starting to roll over due to waning demand on the physical front, a powerful short-covering rally lifted the spot month by as much as 2600 points between Tuesday's low of 188.85 cents and intra-day high of 115.06 cents.

Over the past three weeks traders have been steadily expanding open interest to 199'158 contracts, up from just 172'588 contracts on March 14. A big chunk of this increase came in the form of bear spreading, as traders were betting on a reversal of the steep inversion that exists all the way out to the December 2012 contract.

Until a few days ago this strategy seemed to work quite well, but with May approaching its notice period, anyone short the spot month doesn't have the luxury of time and once prices dipped below 190 cents on Tuesday, fixations and short-covering created enough outright buying to force a strong reversal.

As a result traders started to get out of bear spreads in a hurry, which forced the May/July inversion all the way out to 1900 points, or more than 1100 points over where it had traded two days ago. The July/Dec spread, which seemed to be the main object of speculation lately, widened back out to over 5800 points after it had narrowed in to 4700 points on Tuesday. In an effort to reign in speculation in spreading, the exchange announced this afternoon that it would raise margin requirements on spreads from 2'000 to 2'500 dollars.

US export sales followed a familiar pattern last week, whereas resistance to current crop prices led to a net reduction in sales of 15'700 running bales for the current marketing year, but commitments for next season increased by a decent 275'100 running bales. Meanwhile shipments reached a marketing year high of 539'700 running bales, bringing total export for the season so far to right around 10.0 million bales.

Outside markets may have played a helping hand in the strong showing of NY futures this week, as corn traded to an all-time high of 7.72 dollars per bushel before retreating somewhat. Corn prices have more than doubled since last summer and are now three times what they were five to ten years ago, when they traded in a 2 to 3 dollar range year after year. With new crop corn at 6.44 dollars and new crop soybeans at 13.67 dollars a bushel, cotton has its work cut out to stay competitive.

Then there were some developments on the currency front that are worth mentioning since they are likely to have an impact on commodity markets over time. While the US is dealing with a budget crisis, Europe is currently confronted with the financial rescue of Portugal, which is in need of some 90 billion Euros to stay solvent.

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