NY futures move sharply higher

04 Jun '11

6 min read

That being said, at the right price we may still see some of the carry-over stock end up on the board, but for now anyone who is short July and doesn't have the cotton to back it up, will likely have to pay his way out of it. This includes the still 1.85 million bales in unfixed on-call sales in July, against most of which merchants carry futures short positions.

Yesterday's big jump in December open interest of 4'263 contracts signals renewed buying activity by speculators. With Ag commodities in a weather market, speculative interest is once again high. It was less than a month ago when the CRB-index took a big hit from deleveraging after exchanges raised margin requirements on several commodities in order to reign in speculators.

However, while margin increases may temporarily derail an uptrend in commodities, they are unable to override bullish fundamentals. This week December corn traded to a new contract high of 6.95 dollars/bushel, while November soybeans closed at 13.93 dollars/bushel, just 4 cents shy of their February 9 contract high.

Many cotton traders still believe that prices will eventually have to fall back to their longer-term average. Although nothing is impossible, we see this as highly unlikely. With a bushel of corn at 7 dollars and soybeans at 14 dollars, cotton has its work cut out to stay competitive. Just look at what happened this spring, when cotton wasn't able to attract more than 12.5 million acres in the US despite a spot price that was three times the historical average. Had corn and soybeans traded at levels of five years ago (2-3 dollars for corn and 5-7 dollars for soybeans), cotton would have seen its acreage go up by several million acres more.

In other words, we cannot look at cotton in isolation but have to view it in the context of the entire Ag complex. As long as food prices remain high, cotton will have to be attractively priced as well. A growing world population and rising protein consumption combined with the fact that more food is being used to produce energy and to feed livestock should all but guarantee that corn and soybean prices will remain at elevated levels for years to come.

So where do we go from here? The large de-certification should keep July shorts on the run, while December continues to be supported by a troubled US crop. Physical prices have continued to struggle despite the rally in New York, as mills are still in the process of adjusting their pipeline inventory.

However, there are some positive signs emerging from the yarn market, as prices seem to finally be stabilizing. Going by recent retail sales reports from various economies around the globe, end-user demand seems to be stronger than what the current statistics are suggesting, which means that the expected production surplus may end up being a lot smaller than projected. New crop prices have probably gotten a bit ahead of themselves after December has rallied by over 25 cents since May 13 and we may therefore see a consolidation phase, but given the state of the US crop we believe that any dips back to the 130 level or below should be used as a buying opportunity.

Plexus Cotton Limited

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