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Plexus cotton market report

Mar '07
NY futures traded mixed this week, with May closing down 22 points at 53.22 cents, while July ended the week unchanged at 54.27 cents and December advanced 55 points to close at 58.65 cents.

What a dull market! For the last twenty sessions the May contract has posted daily closes of somewhere between 53.06 cents and 54.56 cents, a range of just 150 points. Likewise, the AWP has remained relatively steady, measuring between 42.70 cents and 44.06 cents during the same four-week period. With next week's AWP set at 43.79 cents we don't see much hope of escaping this inertia, unless some unexpected event injects the market with new life.

Despite this listless trading, both bulls and bears continued to increase their bets in recent weeks, with open interest setting a new record of 215'521 contracts or 21.55 mio bales yesterday. A year ago, open interest amounted to 132'487 contracts at this date, while two years ago it stood at 115'816 contracts.

When we analyze where this increase in open interest has been coming from, we can attribute most of it to index funds, which have substantially boosted their long exposure and currently own an equivalent of around 9.6 mio bales out of the 21.55 mio longs. Short speculators and hedgers were willing to take the other side by increasing their exposure to over 10 mio bales each, despite the depressed price level.

From what we can see, investments into commodities via index funds are still expanding, suggesting that these index fund sponsored long positions will continue to grow over the coming months. This begs the question whether there will be enough shorts willing to absorb the additional buying at such low prices. Are they really going to be happy to hold 25 or 30 million bales in short futures at 50-some cents when the next US crop is expected to drop below 19 million bales? Or will they finally begin to ask for a risk premium?

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