NY cotton futures rally this week

The problem is that the trade is substantially net short in current crop futures (over 10 million bales) and will either have to roll this short forward to new crop or buy it back over the next five months. Rolling current crop to December is no viable option at the moment, given that we have an inversion between July and December of over six cents.

If buying back is the only way to go, the question is ‘who is the trade going to sell it to’? Index Funds will provide liquidity to roll short March futures into May and so on, but that’s like kicking the can down the road, because a roll doesn’t equate to net buying.

Speculators are the group that’s long, but with the chart painting the picture of a strong and rising market, these specs are in no hurry to abandon their long holdings anytime soon. If anything, speculators are probably inclined to buy additional longs after the market has been able to shrug off an onslaught of index fund selling lately.

Therefore, with the trade having to buy back current crop futures and speculators possibly wanting to add to their long holdings, there is currently no one willing or able to step forward as a strong seller. This means that the market will have to rise in order to attract potential sellers.

New crop is a completely different animal! When current crop prices rally, they pull December futures along to some degree, but we suspect that selling pressure will intensify once the psychologically important 80 cents level is reached. Open interest in new crop futures amounts to only around 14’000 contracts at the moment, but with the planting window fast approaching, we should see a lot of hedging in the months ahead.

Plexus