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Cotton market holds back on loan redemption

May '07
The weakness continued as yet another new contract low was hit on the N'07 (46.81) as we are still feeling the effects of the bearish 06/07 S&D numbers from Friday. We have an unusual situation at the moment which is keeping the market on the defensive.

Business is being done at these levels, but instead of the trade being in a position to buy the market in large volume and go long, they are forced to hold back because of the record amount of loan cotton (9.9 million bales) that needs to be redeemed from the loan prior to the new crop A index blend starting on Friday.

With a 4.00 cent differential in the new crop A index and the old crop, along with a tight foreign growth stock situation and a small amount of time left before expiration, many merchants are anxious to redeem as much as they can.

This not only keeps them from being strong scale down buyers, but also leads to panic selling of out of the money puts and calls to protect them in case the market goes lower. Specs and funds only have to follow the technical weakness lower and are getting rewarded for staying short. The volume was healthy at over 20,000 futures and 15,000 options.

Spec hedge tomorrow is expected to be shorter as the commitment of traders on Friday showed their short going 1.5% shorter. This is a bit more than the week before so we might see the spec hedge on Tuesday going from 4.4% last week to 6.5% tomorrow.

Everyone including the locals keep trying to pick a bottom, but until we see the spec position go longer, we should stand back, because they are the only ones who can buy it.

Click here to view graphical presentation:


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