NY cotton futures end with gains this week

After July had fallen to a new low of 66.10 cents on Monday, the selling finally started to subside and buyers came out of their hiding. Last week we talked about the drivers behind the recent collapse in the cotton market, which saw prices drop by over 26 cents between April 23 and June 4.

When the spot month traded in the mid-60s earlier this week, most of these negative influences began to fade away, allowing the short-term momentum to reverse to the upside.

It seemed as if the various market participants all underwent a sentiment change at around the same time, which allowed the market to rise in a vacuum of limited selling.

Growers were no longer keen in hedging or selling their crops once prices traded in the mid-60s, which in many cases represents a level that is at or below growing cost. US growers in particular are turned off by these low prices and they may instead put their cotton in the government loan at 52 cents and wait it out.

If the US crop were to get locked away for some time, it would remove pressure from the market. After the rest-of-the-world produced a surplus of 4.4 million bales in the current season, the USDA now predicts a production shortfall of 6.8 million bales outside the US in 2012/13.

Therefore, if US cotton plays ‘hard to get’ in the loan, then this enormous crop pressure that everyone is expecting is less likely to materialize, at least not at depressed price levels.

While merchants and locals were still engaging in some damage control late last week as well as Monday by doing more panic-driven bearish options strategies, this too appeared to eventually run its course. Judging by the latest CFTC report, which showed a small drop in trade longs after two weeks of steep increases, the need to play defense seemed to be a lot less pressing.

Short speculators and chart traders, who base their decisions mainly on technical indicators, had a very successful run in this bearish move and were quick to take their profits once they had confirmation of a short-term trend reversal. This removed yet another source of selling.

Last but not least there was the anticipated shift on the macro side, as money managers once again flipped the switch to “risk on” after they became more confident that a new round of stimulus might be just around the corner. While the Fed has so far resorted to lip service only, China’s rate cut by 25 basis points was enough to embolden some hedge funds to return to riskier assets.

Cotton was clearly benefitting from a wave of buying in outside markets, as stocks and commodities rebounded sharply this week. Food crops were particularly strong, with November soybeans closing at 13.39 dollars/bushel, up 70 cents since last Thursday, after the USDA reported continued strong export sales to China.