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NY futures continued to advance this week

Mar '07
In a week that saw wild swings in the world's financial markets, cotton futures traded in a relatively narrow range between 1000 and 1140 points above the current AWP of 42.70 cents. Steady spec and fund buying lent support to the market, but strong trade selling near 54.00 cents capped any attempt to advance further.

The fact that the trade had several opportunities to lock in an 1100+ spread to the AWP could lead to an increased number of redemptions by tonight, since next week's AWP will jump by 80 points to 43.50 cents. As of Tuesday, a total of 5.89 mio running bales had been redeemed from the loan, up from 5.46 mio bales the week before, but still over 7.0 mio bales shy compared to the same date a year ago.

The market will have a very tough time advancing much beyond this 1100 point spread to the AWP, for a simple reason. With grower equities now available for as low as 100 points in the Mid-South, it does not take a whole lot more than 1100 points to make deliveries against the May contract work. The wider the spread, the more it attracts loan cotton to the board, and there are currently still 13.2 mio bales waiting to be redeemed. Therefore, the market needs to stay just shy of a spread that works for deliveries, but at the same time it needs to offer enough of an incentive to keep cotton coming into the marketplace.

The fact that grower equity values have dropped considerably over the last couple of months has allowed US cotton to become more competitive in the global marketplace. The one flaw in the US price mechanism is that there is no provision to account for grower equity values when comparing US prices to world prices. There is only a shipping differential of currently 11.49 cents and a quality adjustment of 4.65 cents (Middling to SLM) to reduce the A-Index to the Adjusted World Price (AWP).

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