New York cotton futures rebound

24 Mar '12

5 min read

So what is this huge short interest in May and July futures against? For one, there are still over 30'000 contracts or 3.0 million bales in unfixed on-call sales on May and July, and merchants hold sold short futures or options against many of them. Then there are basis-long positions in foreign growths, such as Australia, Brazil or various African origins, where a physical long is being 'protected' with a short futures or options position. The last category involves speculative short positions, with large specs/hedge funds currently holding the largest short position in over three years, with 8000 contracts in net shorts and 44'000 contracts in outright shorts. Although some of these shorts may belong to December, specs typically play in nearby futures for liquidity reasons.

So where do we go from here? We don't like the current set-up in the futures market, where the trade and speculators are both leaning towards the short side, while inactive index funds are holding the longs. Since the US is almost sold out, we believe that it won't take much to spook these shorts into covering their positions in a less than orderly fashion. As we have pointed out last week, we don't think it is a good idea to be short nearby futures and would advise to do any short hedging in the December contract instead.

Plexus Cotton Limited

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