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NY cotton futures rally this week on short covering
31 Mar '12
5 min read
US export sales were once again above expectations last week at 157'500 running bales, with broad-based participation of 16 markets, while shipments were impressive as well at 352'100 running bales. For the season we now have total commitments at 12.0 million statistical bales, whereof 6.8 million have so far been exported.
Some traders seem to be waking up to the fact that it may be dangerous to be short futures in a nearly sold out market. Over the last five sessions open interest in May has dropped by 13'712 contracts, as some shorts obviously decided to either roll or cover their positions. However, overall open interest dropped by only 1'500 contracts, as July picked up around 7'000 lots, while December added about 5'000 contracts.
Although the reduction in May open interest is certainly a step in the right direction, there are still a combined 13.2 million bales open in May and July, which seems disproportionately high compared to the amount of cotton that remains uncommitted in the US. Also, unfixed on-call sales have barely changed last week, as there are still over 3.0 million bales open in May and July!
So where do we go from here? After nearby futures rallied more than 600 points in the last ten sessions, we may see some consolidation in the days ahead, but the drivers that have fueled this advance are still largely in place.
The upcoming index fund roll will provide plenty of liquidity for spec and trade shorts to get out of harms way, and we feel that whoever stays in the game beyond that point is playing with fire. In particular we would advise mills not too wait until the last minute with their fixations!
While current crop looks well supported to us at the moment, new crop is a different story. Although there will be planting reductions, we may still end up with a global crop that is several million bales larger than mill use.
Unlike in the current season, there is very little cotton sold forward and as explained above, we expect China to be a lot less active on the import front next year. Therefore, unless weather causes trouble on the supply side, we don't see much upside potential for December and feel that growers should use options strategies to protect themselves against a potential drop in prices.
Some traders seem to be waking up to the fact that it may be dangerous to be short futures in a nearly sold out market. Over the last five sessions open interest in May has dropped by 13'712 contracts, as some shorts obviously decided to either roll or cover their positions. However, overall open interest dropped by only 1'500 contracts, as July picked up around 7'000 lots, while December added about 5'000 contracts.
Although the reduction in May open interest is certainly a step in the right direction, there are still a combined 13.2 million bales open in May and July, which seems disproportionately high compared to the amount of cotton that remains uncommitted in the US. Also, unfixed on-call sales have barely changed last week, as there are still over 3.0 million bales open in May and July!
So where do we go from here? After nearby futures rallied more than 600 points in the last ten sessions, we may see some consolidation in the days ahead, but the drivers that have fueled this advance are still largely in place.
The upcoming index fund roll will provide plenty of liquidity for spec and trade shorts to get out of harms way, and we feel that whoever stays in the game beyond that point is playing with fire. In particular we would advise mills not too wait until the last minute with their fixations!
While current crop looks well supported to us at the moment, new crop is a different story. Although there will be planting reductions, we may still end up with a global crop that is several million bales larger than mill use.
Unlike in the current season, there is very little cotton sold forward and as explained above, we expect China to be a lot less active on the import front next year. Therefore, unless weather causes trouble on the supply side, we don't see much upside potential for December and feel that growers should use options strategies to protect themselves against a potential drop in prices.
Plexus Cotton Limited
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