NY futures perform mixed this week

21 May '11

6 min read

While these large specs hold relatively small outright positions in the market at the moment (3.4 million long and 0.8 million short), they have obviously placed huge bets on the price movement between July and December.

Therefore, if speculators who shorted July and bought Dec at differences of 50, 60 or more cents a while back, decided to take profits with the spread at 20 or 25 cents last week, it would have generated buying power in July and selling pressure in December. In a relatively illiquid market with a current open interest of only 150'000 contracts in futures, it does not take a lot of volume to create volatile moves. Over the last nine sessions the July/Dec spread has traded from less than 21 cents to over 38 cents before settling at a little over 36 cents.

While lifting July, the above-mentioned spreading may have put undue pressure on December, which traded as low as 113.76 cents last Friday before recovering somewhat this week. Although the Delta and Southeast made great strides in getting their crops planted over the last ten days, West Texas is still waiting for rain and as of this writing there is no significant moisture in the forecast, because the dry line is expected to stay well to the east of Lubbock. Even if West Texas did eventually get some rain, the crop would be off to a late start and therefore more susceptible to an early frost or a wet harvest.

Outside markets were supportive for cotton this week, as some of the managed funds seemed to return as buyers of commodities after the big drop two weeks ago, with wheat, corn and soybeans all displaying renewed strength. We continue to believe that demand for Ag commodities will remain robust, even with the US struggling for growth. Analysts are often too black and white in their views about inflation and deflation.

While prices of things connected to the local economy (real estate, services etc.) may continue to soften, food and energy are daily necessities without which people cannot live and they need to be seen in the context of global demand. As long as food prices stay firm, cotton will have to maintain a certain price level in order to successfully compete for acreage.

So where do we go from here? Although physical prices are expected to remain under pressure, July futures may continue to defy gravity due to short covering, especially if the certified stock were to disappear. There are still 2.14 million bales in unfixed on-call sales in July, which continue to provide support. July may still collapse in the end, but probably not before most of the remaining shorts have been forced out. We still like December at 120 cents given the pent-up demand that is accumulating from mills postponing their buying and the uncertainty surrounding the Texas crop.

Plexus Cotton Limited

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