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Certified cotton stocks grow to a record 1.14 million bales
18 Apr '08
5 min read
Typically we see the spot futures month gravitate towards the price of cash cotton in the marketplace, which would put the 'fair value' for May at around 70 cents or maybe slightly below that.
However, due to the fact that there is more than enough carry in the market, this price relationship to cash cotton should matter much less than usual. The question is whether anyone is willing to take on this arbitrage opportunity that requires such substantial financing?
Over the last few years we have typically seen a softer market as we headed into the notice period, but this string was broken two months ago when the March contract unexpectedly rallied from 69 to 76 cents in the final week before First Notice Day, which set the market up for the massive trade short-covering rally that followed about a week later.
Could it happen again? Absolutely! If we see a strong taker(s) emerge for the May contract - and it doesn't take much arm-twisting at this great spread, just a lot of money - it would send a strong signal to the market and we could be off to the races again.
Remember, according to the latest Spec/Hedge reports the trade is still substantially short, having increased its position again over the last couple of weeks. ICE (futures only) has the trade 19.4 mio bales outright short, while the CFTC (futures and options) showed the trade 16.8 mio bales net short, although that report is as of April 8 and does not reflect the trade selling of last week.
Open interest is still holding at around 26.2 mio bales, which is basically the same level as a week before the March notice period, when the open interest stood at 26.4 mio bales. We just hope that the trade won't fall into the same trap again, because it probably wouldn't take a lot of new spec buying to push these weakened trade shorts over the edge.
Fundamentals are not much changed from two months ago, but they seem to take a back seat these days. The main difference to March is that Hedge Funds have experienced their version of a Credit Crunch last month, as many of them were forced to deleverage and it is unclear at this point whether they have the financial means to sponsor a new wave of buying.
Nevertheless, given all the macroeconomic circumstances which we talked about at length in pervious reports, we feel that from a risk/reward point of view the 70 cents level presents a good value, especially for traders with a medium to longer term outlook. While the short-term weakness we are currently experiencing may have further to go, we expect the long term support near 70 cents to hold.
However, due to the fact that there is more than enough carry in the market, this price relationship to cash cotton should matter much less than usual. The question is whether anyone is willing to take on this arbitrage opportunity that requires such substantial financing?
Over the last few years we have typically seen a softer market as we headed into the notice period, but this string was broken two months ago when the March contract unexpectedly rallied from 69 to 76 cents in the final week before First Notice Day, which set the market up for the massive trade short-covering rally that followed about a week later.
Could it happen again? Absolutely! If we see a strong taker(s) emerge for the May contract - and it doesn't take much arm-twisting at this great spread, just a lot of money - it would send a strong signal to the market and we could be off to the races again.
Remember, according to the latest Spec/Hedge reports the trade is still substantially short, having increased its position again over the last couple of weeks. ICE (futures only) has the trade 19.4 mio bales outright short, while the CFTC (futures and options) showed the trade 16.8 mio bales net short, although that report is as of April 8 and does not reflect the trade selling of last week.
Open interest is still holding at around 26.2 mio bales, which is basically the same level as a week before the March notice period, when the open interest stood at 26.4 mio bales. We just hope that the trade won't fall into the same trap again, because it probably wouldn't take a lot of new spec buying to push these weakened trade shorts over the edge.
Fundamentals are not much changed from two months ago, but they seem to take a back seat these days. The main difference to March is that Hedge Funds have experienced their version of a Credit Crunch last month, as many of them were forced to deleverage and it is unclear at this point whether they have the financial means to sponsor a new wave of buying.
Nevertheless, given all the macroeconomic circumstances which we talked about at length in pervious reports, we feel that from a risk/reward point of view the 70 cents level presents a good value, especially for traders with a medium to longer term outlook. While the short-term weakness we are currently experiencing may have further to go, we expect the long term support near 70 cents to hold.
Plexus Cotton Limited
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