NY cotton futures loses previous week's upside momentum

As anticipated the market was unable to sustain last week’s upside momentum and started to run out of buyers when December traded around 78 cents. Shorts were for the most part done covering last Friday after 3 days of heavy turnover and the trade helped to cap the rally by putting on a fair amount of bearish options strategies, most of which were in the March contract.

Friday’s sharp drop in volume was the first sign that this ‘flash rally’ was running out of steam and when traders returned from the weekend, sellers started to take control of the market, with hedge selling and sell stops by speculators pressuring values. Over a period of just ten days we saw the market rally from a low of 70.41 to a high of 79.19 cents in five sessions, only to see it collapse back to a low of 72.06 cents in the following five.

The market is once again near the 71-72 cents support level, from which it had launched last week’s rally. We believe that this price level represents more or less ‘fair value’ when we compare spot futures to the physical market. In other words, if a trader were to buy certified stock at around 71-72 cents, he should be able to compete in overseas markets, where prices for high grades are currently in the low to mid-80s on a CIF Far East basis, depending on the origin. Conversely, for someone considering shorting spot futures at the current level, it may be difficult to procure cash cotton at a cheap enough price to deliver it profitably to the board.

The above ‘line in the sand’ is of course a moving target and depends on how much price pressure there is going to be on US high grades. The fact that the US crop has seen fewer deliverable grades than usual at the beginning of harvest and the lack of pressure from outside growths has allowed the futures market to hold above 70 cents for now.

Many traders feel that this will eventually change as crop pressure builds both in the US as well as in foreign growths, with India probably posing the biggest threat in that regard, both from a price as well as a volume point of view.

Today’s US export sales report confirmed that US cotton is still among the cheapest at this point, based on the fact that there were no less than 16 markets on the buyers list. Even though the headline number was disappointing, as just 49’000 running bales of Upland and Pima were sold for the current marketing year, new sales of 151’200 bales were actually quite good considering that prices rallied last week. What spoiled this otherwise decent number were cancellations of over 100’000 bales, most of which belonged to Bangladesh.

Shipments were also lagging behind at just 67’700 running bales, but this has to do with the fact that old crop stocks are exhausted, while new crop supplies are just entering the pipeline.