NY cotton futures resume upward trend this week

15 Feb '14

5 min read

However, with export and domestic commitments for this season already at 12.9 million bales and a further 2.0 to 2.5 million bales needed to bridge the summer gap from August to October, it is highly unlikely that merchants have extra premium cotton to give up to the board. And even if one merchant were to have some surplus cotton, others would be glad to take it up.

Also, we currently don’t have a situation in which the futures market is trading at a large premium above the cash market, which has often been the case in between notice periods. We estimate that the premium to cash currently amounts to no more than 100-200 points and the 244’000 bales in certified stock therefore pose no threat to the longs. If March were to drop to 85/86 cents, there would be plenty of takers since the board would become the cheapest source of US cotton.

US export sales continued at a pace that is unsustainable in the longer run, because shippers would simply run out of cotton to sell in a few months’ time. For the week ending February 6, sales of Upland and Pima cotton amounted to 127’900 running bales net for the current marketing year, while another 81’900 running bales were sold for shipment August onwards.

Once again there were 19 different markets participating, which shows that there is continued broad demand for US cotton. Total commitments for the season now amount to 9.3 million statistical bales, of which 4.9 million have so far been shipped.

A comparison to last season shows just how tight the current US supply situation has become. Last year we had supply at 20.67 million bales (3.35 beginning stocks + 17.32 million crop), while this season it is at only 17.09 million bales. A year ago commitments were at 14.2 million bales in early February (10.7 million in export commitments + 3.5 million domestic use), whereas they are slightly lower this time at 12.9 million bales (9.3 million in export commitments + 3.6 million domestic use).

Nevertheless, when we compare remaining supplies, there were still around 6.5 million bales available last February, while we are currently down to just 4.2 million bales. Both of these figures don’t take into account what has already been committed to domestic and foreign mills for August onward shipment.

In other words, if we were to subtract 2.0 million bales for shipment in the coming marketing year, the comparison of unsold supply would drop to 4.5 million bales a year ago versus just 2.2 million bales now. No wonder the market acts as if it was running out of cotton!

So where do we go from here? The trade continues to fight the rising trend in current crop, remaining stubbornly short in the hope that the market will eventually provide them with a big break to get out of trouble.

Rising open interest this week shows that short positions are not being closed out yet, but are instead getting rolled forward. There is still time, but the trade is playing with fire given its still sizeable net short position in New York, which to a large degree is tied to the 5.5 million bales in unfixed on-call sales.

Plexus Cotton Limited

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