Therefore, credit lines of many shippers may be a bit stretched at present and the last thing they need is more margin calls. The trade seems to have its hands tied at the moment and if anything it would probably like to reduce its exposure in the future market, not add to it.
This leaves speculators in the driver's seat and with a trend reversal in the making they are taking steps to position themselves in the direction of the emerging trend. On the one hand we have new spec longs entering the market, while on the other hand spec shorts are getting an exit signal.
At last count, outright spec shorts still amounted to around 9.2 mio bales according to the NYBOT spec/hedge report (futures only), while the latest CFTC report (futures and options) showed them around 6.8 mio bales short. These are staggering positions that have the potential to add a lot of fuel to a fire.
According to the NYBOT report, specs were just 8.7% net long as of last Friday, but in a rising market it is not unusual for the spec net long position to reach 40% of open interest. At the current open interest of 222'000 contracts this would translate into 70'000 contracts of additional buying.
As we have seen repeatedly over the last five years, there are times when the prevailing fundamental view of a commodity takes a back seat to the wall of money that enters the scene. The soybean market is just one of many examples, where a seemingly bearish fundamental outlook (large stocks) was swept away by a flood of speculative money.
The initial reaction by the trade is typically to sell into the rally and then sell even more as the market continues to advance, only to eventually be forced out of these shorts after the rally has reached unexpected levels, which in turn propels prices even higher.
It remains to be seen whether the cotton market will follow in the footsteps of soybeans and corn, but it is definitely on the radar screen of many hedge fund managers with very deep pockets. To bet against the changing trend and the money makes no sense to us from a risk/reward point of view and we therefore believe that the market has limited downside potential.