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Electronic cotton trading slow

Jul '07
Market was trading lower electronically and after the open found a low close to yesterday's level at 66.25 and then rallied all the way back to set new contract highs. Volume was higher today on the heels of the USDA report as traders were squaring up positions in expectation of a friendly USDA report.

Futures volume was over 28,000 but options were over 42,000 as the trade continue to take precautions for further upside potential. The majority of buying at the moment is coming from the trade who are rolling up their short positions and putting on new long positions to take advantage of the rally.

Looking at the USDA report coming out tomorrow, we are expecting a cut in U.S. production after we lost 1 million acres on the last acreage estimate.

This may cut the crop 1.5 million bales down from 18.8 to 17.3-17.6. However, it should be offset by a reduction in exports as well and the total change in 07/08 ending stocks may not be as severe (500K reduction max).

This information is already in the market and there is still a good chance that there could be an increase in Chinese production (1-2 million bales max) which has been expected that could cancel out the cut in U.S. production and leave world ending stocks unchanged to higher. However, if China is not adjusted, then we will see very tight world ending stocks after the cut in U.S. production that could lead to another strong rally in NY.

Technically, the market could use a pull back and consolidation from this 15 cent rally, but we are in new territory that is chasing soybeans and corn for next years acreage. Fundamentally, it will be very difficult to find heavy demand at these levels and eventually the USDA will have to make adjustments to the very optimistic consumption numbers for 07/08.

However, in the short transition between crops, the mills who were caught off guard by this rally will have to buy and we will probably not see any significant correction if at all until later in the year as long as new crop conditions remain positive.

Click here to view graphical presentation:


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