NY futures continue to advance

06 Jul '07

4 min read

NY futures continued to advance this week, with December gaining 226 points to close at 63.89 cents.

Last Friday's surprisingly bullish USDA acreage report had some interesting implications both from a fundamental and technical point of view.

To the cotton trade it signaled that the US supply situation may turn out to be quite a bit tighter than originally thought, especially now that China is back in the game, and as a result these higher prices may be justified after all.

So far most traders have been in denial of this 12 cents rally, believing that the market would not be able to sustain these elevated levels for long before selling off again. However, we feel that the acreage report has changed the psychology in this regard, with many traders now waiting for an opportunity to buy back at least some of their short futures.

According to the latest CFTC report, which includes futures and options, the trade was 13.8 mio bales net short as of June 26. This is by far the largest short position the trade has ever owned!

When we look at the US supply situation as we head into the new season, we start with beginning stocks of around 9.5 mio bales, to which we may add a 'best case scenario' US crop of 18.0 mio bales.

This would give us total supply of around 27.5 mio bales, or more or less the same amount as a year ago. That's still a lot of cotton, but what is different this time around is that China has been in de-stocking mode this season and has far fewer stocks than last summer, which should force it to be more active on the import front over the coming season.

For technical traders last Friday's rally triggered a strong buy signal, since the market took out resistance on the daily, weekly and monthly chart. December broke above its previous contract high of 63.50, dating back to last August, and it closed 39 points above it.

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