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Near term demand for physical cotton rises above supply

Feb '07
As evidenced two weeks ago when we noted the increase in open interest in the March contract, the market inverted this week as the near term demand for physical cotton rose above the supply of what could be bought in the cash market at current cash prices.

Thus, the market inverted, discounted the current value of cotton futures for the coming months, and pushing the nearby New York March contract some 200 points above the May contract. Then with certificated stocks being the cheapest cotton available to the market, some 42,744 bales were decertificated, dropping the level of certificated stocks to slightly below 510,000 bales. It should be expected that cert stocks will fall a bit further.

With US cotton going to the loan the market, at current offers, can only hope to "buy" cotton out of certificated stocks until prices rise enough to meet near term grower price demands. However, growers will tend to let some cotton go as prices creep 100 points higher, and at 200 points higher, the market will be swamped with cotton and drive prices back down. December slipped to near 56 cents, down nearly 400 points from a week ago.

However with prospects of ending stocks rising to 8.2 to 8.5 million bales come July 31, 2007, both old crop and new crop prices have little possibility of moving higher. The market inversion sent the May futures contract down to the 53-53 cent range. The typical planting season scare seems to be the next hope for a price rally back to 55 cents.

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