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Merchants manage to sell another 4-5 mn bales of cash cotton

Mar '07
NY futures rebounded this week, with both May and December gaining 97 points to close at 54.19 and 59.62 cents, respectively.

For a fifth week in a row, the May contract remained locked into a very tight range, as it has closed no lower than 53.06 cents and no higher than 54.56 cents since February 22nd. Despite this seemingly lackluster trading range, open interest continued to surge, growing from 197'203 contracts to 227'464 contracts over this five-week period.

When we look at where this 3.0 million bale increase in open interest has occurred, we find that July saw the biggest jump at 1.98 million bales, followed by December at 1.43 mio bales, while May open interest actually dropped by 0.43 mio bales.

As we have stated before, it makes perfect sense to us to see new longs entering the cotton market after what has happened in other agricultural commodities since last summer, along with investment money that is continuously flowing into index funds. But we wonder how much more the shorts are willing to pile on to their already massive positions at these relatively unattractive prices.

Of course, the trade net short position in futures and options of around 11.5 mio bales makes sense in that most of these shorts are either against physical long positions, on-call sales or anticipated loan redemptions.

As we all know, the trade theoretically has the potential to sell yet another 10 mio bales in futures and options during a market rally in order to lock in a workable spread against loan cotton.

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