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NY futures turn back up this week

Oct '09
Once the AWP is significantly higher than the 52.00 cents loan, it is no longer relevant to US pricing, especially this early in the season when loan cotton has not yet accumulated a lot of storage and interest. This would also make it difficult for the futures market to run away to the upside, because it would no longer have to keep pace with a rising AWP, but instead it would have the 52.00 cents loan level as its reference point. Therefore, once the futures market approaches 70 cents, it offers an attractive spread for loan redemptions.

Of course the above described scenario only works if there are no more setbacks to the US crop. If West Texas gets into serious trouble all bets are off, as it would force trade shorts to scramble out of positions, which could lead to an explosive move to the upside. However, at this point it does not look like a frost is going to occur in West Texas next week, which means that the crop still has a chance to finish. We will have to keep our fingers crossed for the next three or four weeks!

So where do we go from here? Strong outside markets and the weather remain the main drivers at the moment. The weather remains a major worry as two cold fronts are dipping down towards the cotton belt, although at this point no season-ending frost is forecast. The Mid-South crop is a disaster this year, but fortunately it "only" encompasses 3.2 million bales, while the remaining 10 million bales may still produce a decent crop.

However, there is no more room for error since the crops are late and time is running out. The market will therefore be on edge for the next 3 or 4 weeks and any turn for the worse could send values skyrocketing. Furthermore some powerful speculators have cotton on their radar screen and they will not hesitate to commit to long positions if the chart gives them a reason to. Depending on what indicators these chart traders are following, the trigger points are somewhere between 64.04 and 65.47 cents.

The market is well supported and there is probably a better than 50/50 chance that the market will take out the triple top and rally towards 70 cents in the near future. It may therefore not be a bad idea for anybody with short futures to exchange them for some in the money puts or put spreads!

Plexus Cotton Limited

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