New York cotton market up

21 Jan '12

5 min read

It is difficult to get too bearish in the face of all this Chinese buying, but at the same time traders realize that the cotton China is lifting off the market has yet to be consumed. It therefore may be difficult for prices to break out of their current sideways trend. For that to happen it will likely take a sizeable imbalance between supply and demand next season, which doesn't seem to be on the cards.

Early indications are that global production will drop, most notably in China, where a 10 percent planting reduction is expected, while consumption should continue to recover. Therefore, if we were to see output drop to by let's say 6 or 7 million bales and consumption were to recover by 2 or 3 million bales, we might end up with a more or less balanced position next season.

So where do we go from here? The cotton market has been able to attract new buyers lately, as the sharp rise in open interest indicates. Since January 9, open interest has increased by nearly 10'000 contracts, which validates the recent strength. Speculators have been net buyers, while the trade continues to sell into rallies. The technical picture and recent market action suggest that the uptrend may have further to go.

However, eventually speculators will be done buying and it remains to be seen whether the trade will be there to take over. Based on what we know today that's not likely, but if the statistical picture starts to tighten due to supply/demand revisions, the trade may change its view and cover existing short positions. For now we believe that the market will continue to trade sideways, albeit in a somewhat higher range.

Plexus Cotton

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