The NY futures market continued to move higher this week, as July gained another 96 points to close at 51.05 cents, while December advanced 151 points to close at 56.66 cents.
We may now be seeing the signs of a market in transition, as shorts are less willing or able to defend their territory and new longs continue to move in from the sidelines. The latest spec/hedge report showed that the spec net long position grew by 5% last week and amounted to 7.6% of open interest as of last Friday, as spec shorts covered 4'136 contracts and spec longs added 7'407 contracts. Outright spec longs now amount to around 11.1 mio bales, while outright spec shorts still hold around 9.3 mio bales.
Meanwhile, the trade continued to add hedges against recent loan redemptions, as shorts increased by 9'760 contracts, whereas longs were down by 1'783 contracts. Excluding index funds, the cotton trade carried a net futures short position of 11.6 mio bales as of last Friday. That number is based on the NYBOT report, which excludes options, but the CFTC report, which includes options, is not too far off and shows the trade at 10.4 mio bales net short as of May 22nd.
When we analyze what the trade is hedging against with its fairly large net short position in New York, we can break it down into the following three parts:
1) Physical long position in US cotton: When we look at how much US cotton is currently unsold, we come up with around 7.8 mio bales as of May 17th. We arrive at this number by first subtracting 13.5 mio bales of export sales and 4.9 mio bales of domestic commitments from a total supply of 27.65 mio bales. We further subtract 0.65 mio bales of export sales for August onwards and at least 0.8 mio bales of domestic commitments for August/September delivery, which gives us this 7.8 mio bales unsold number.
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