Merchants manage to sell another 4-5 mn bales of cash cotton
31 Mar '07
3 min read
But in practice we will never see all of this cotton redeemed, no matter how great the spread looks, since there are constraints on the financial side, position limits, fear of carry etc. that will curb the enthusiasm. Nevertheless, whatever the amount may be, it poses a formidable resistance to overcome and that is the reason why so many traders are convinced that the market can't go much higher.
However, while an appropriate AWP vs. futures spread will certainly attract a lot of trade selling, let's not forget that there will be offsetting transactions to counterbalance some of this selling, when merchants sell cash cotton to mills and when mills fix on-call sales.
For example, let's assume that over the next couple of months some 7.0 mio bales (out of the 10.7 mio bales still in the loan) get redeemed and that traders elect to hedge all of these bales with bearish futures and options. If during that same time frame mills were to fix the 2.5 mio bales of unfixed on-call sales on May and July, and merchants manage to sell another 4-5 mio bales of cash cotton to mills, it would generate enough futures buying to offset the redemption selling.
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