NY Cotton futures display mixed trends this week

28 Mar '14

6 min read

The trade of course still hopes for the reverse scenario, whereby prices were to fall first and allow them to escape relatively unscathed. However, for that to happen spec longs would have to get spooked out of their positions and that doesn’t seem likely at this point.

We still believe that May and July are loose cannons that should be avoided if possible, as they are likely to cause further mayhem in the weeks ahead.

The second part focuses on the December contract, which as the transition month between current and new crop needs to be looked at as a ‘hybrid’ in regards to pricing. Since the US is basically going to sell outthis summer and mills have some pent up demand from trying to avoid expensive current crop prices, it will take some time for the supply pipeline to fill up again.

We therefore don’t expect to see much price pressure before the end of the year, which is why December has the potential to move higher and to extend its premium over March and later contracts.

We believe that March 2015 will be the first contract to fully reflect a more ample new crop situation. If new crop supply/demand expectations materialize and China curbs its imports next season as anticipated, then stocks in the ROW will start to grow and thereby put pressure on prices.

US and Chinese futures are already reflecting these expectations. For example, the January 2015 contract at the Zhengzhou Commodity Exchange, the month with the highest open interest, closed at just 16’010 RMB/ton, or around 117 cents/lb. This is about 2’700 RMB/ton (20 cents/lb) less than the spot month and is it also 1’240 RMB/ton (9 cents/lb) below the just revised Reserve auction price of 17’250 RMB/ton.

In summary, both China and the ROW are adjusting to a new price structure next season and this transition will likely take place in several phases.

Plexus Cotton Limited

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