New York cotton futures drop precipitously this week

15 Nov '14

5 min read

Speculators were net buyers of 3.4 million bales since September 30, but judging by this week’s action they may now be in the process of rebuilding their net short position. This brings back the old dilemma of who is going to take the long side if both speculators and the trade intend to go short.

The futures market is a zero sum game, which means that there has to be a long for every short. Index funds are the only group that is long in the futures market, but they are not expected to increase their position anytime soon since they are dictated only by money flows.

Therefore, it is not possible for both speculators and the trade to increase their net short position at the same time, since one of the two has to be a net buyer.

During the market’s decline between May and July, it was noticed that the trade reduced its net short position, while speculators increased theirs.

Back then the trade was selling its dwindling old crop inventories, which required it to buy back short hedges, plus it was not quite ready to sell new crop futures yet.

However, this time around, with Northern Hemisphere crops starting to stack up in warehouses, the trade may have a greater sense of urgency to seek some downside protection, often via bearish options strategies.

With both the fundamental and technical picture pointing to lower prices, spec and trade selling is likely to weigh on the market until a level is reached at which buyers are willing to step forward in greater numbers.

Support may come from the cash market, since non-US growths have not been following New York down to the same degree, especially in India.

The report opines that the A-index, which was at 67.40 cents/lb on Friday morning, will find support near 65/66 cents, which in turn should help to stabilize the futures market at around 57/58 cents.

“However, since markets tend to overshoot, one cannot rule out a quick move to 55 cents, although the market would probably not stay there for very long,” the report observes.

Upside potential has become very limited at this point, since growers and merchants will be ready to sell rallies in order to lock in a spread to the AWP.

“Therefore, the market is most likely to remain in a sideways trend in the foreseeable future, albeit at a slightly lower level than in previous weeks,” the report concludes by saying.

Fibre2fashion News Desk - India

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