NY cotton futures shows mixed performance this week

23 Nov '13

5 min read

Total commitments for the season now stand at 6.3 million statistical bales, whereof 2.1 million bales have so far been shipped. Including the 3.6 million bales that domestic mills consume this season, the US has already committed 9.9 million bales or 73 percent of this year’s US crop, which we estimate to be at 13.6 million bales. And it’s only the middle of November, with eight-and-a-half months to go in the marketing year!

With just 3.7 million bales to go before this year’s crop is committed, the US doesn’t need to be in any great hurry to put additional sales on the books and rather than making itself more attractive to buyers, the US will probably have to start rationing its remaining supply.

This may happen via a weakening basis of non-US growths, as other origins are not nearly as well sold and may therefore have to lower prices in order to capture business, while US prices should stay comparatively firm.

The latest CFTC report as of November 12 showed a large reduction in overall open interest in the wake of December options expiration. Open interest for futures and options positions combined dropped by 79’141 contracts to 211’295 contracts between November 5 and November 12, as specs and trade both cut their outright long and short positions, although there was little change in their respective net exposure.

Speculators large and small extended their net short slightly from 0.5 to 0.8 million bales, while the trade’s net short remained unchanged at 5.6 million bales. On the other side of the ledger we have Index traders, who increased their net long position from 6.0 to 6.4 million bales.

The fact that specs and the trade are both net short is another reason not to get too bearish on US futures right now. With prices as low as they are and given the advanced stage of US export sales, it is unlikely that either group will pile on additional shorts at this point.

Index Funds, who are the lone group on the long side, are not likely to alter their position by much, although they may become light sellers in early January due to the annual rebalancing.

So where do we go from here? We feel that NY futures are currently cheap enough with December at 75 cents. The question is whether March will follow in December’s footsteps as many traders expect or whether it will be able to muster some strength of its own?

A lot will depend on what happens with the Certified Stock! If a sizeable amount of it disappears over the coming weeks, which is likely, then March will have to ‘buy’ its own Certified Stock and for that it would have to move higher in order to attract cotton away from a highly contested cash market. In the near term we could therefore see March move to the upper end of what we still see as a broader 75 to 82 cents range.

Only once the nearby supply constraints are behind us do we see the potential for additional price pressure in the US market, although given the high level of commitments this early in the season we expect the December lows to hold.

Plexus

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