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Amplified moves in NY cotton market
01 Feb '10
5 min read
For the last 14 weeks export sales have averaged 282'900 running bales and if we were to continue on this furious pace we would be completely sold out of US cotton in 25 weeks from now, or by early August. Also, at current levels, December 10 will not be attracting as many acres to cotton for new crop as would have been the case 5 cents higher.
US cotton has been running the show lately with 1.3 million bales sold in the first three weeks of the year. US shippers have pushed sales of US cotton for several reasons. For one they probably wanted to take advantage of the stronger basis that this drop in the futures market has brought about. Another reason was that the AWP (59.01 cents) has been substantially above the loan rate, which means that unsold US cotton is accruing carrying charges whether it is in the loan or not.
Therefore, holding cotton only makes sense if the board pays full carryings (just starting to happen now) or if the market outpaces carryings, which is not the case at the moment. With the March/May spread widening thanks to an increasing certified stock (around 500'000 bales including bales under review), merchants seem to become less inclined to make price concessions, which should help to stabilize physical prices. We therefore believe that we will sooner or later have to ration demand via higher prices.
So where do we go from here? There is no telling how much more the specs want to sell further. The last CFTC report showed speculators at 4.5 million bales net long, index funds at 7.5 million net long and the trade at 12.0 million bales net short. Therefore, there are still plenty of spec longs that could potentially get liquidated, especially if technical support around 68.50 (Elliott Wave) and 69.00 (weekly chart) is taken out.
However, sooner or later this spec selling will run its course and then there will be no one left to sell, because the trade has no appetite to go futures short at these levels. When that happens there is likely going to be a void of selling into which the market will rebound. We are still bullish going into the second and third quarter but feel that lower futures prices are certainly possible in the short term. We still feel that the best way to play this market at the moment is via the July/Dec spread, since any rebound should be much more pronounced in current crop.
US cotton has been running the show lately with 1.3 million bales sold in the first three weeks of the year. US shippers have pushed sales of US cotton for several reasons. For one they probably wanted to take advantage of the stronger basis that this drop in the futures market has brought about. Another reason was that the AWP (59.01 cents) has been substantially above the loan rate, which means that unsold US cotton is accruing carrying charges whether it is in the loan or not.
Therefore, holding cotton only makes sense if the board pays full carryings (just starting to happen now) or if the market outpaces carryings, which is not the case at the moment. With the March/May spread widening thanks to an increasing certified stock (around 500'000 bales including bales under review), merchants seem to become less inclined to make price concessions, which should help to stabilize physical prices. We therefore believe that we will sooner or later have to ration demand via higher prices.
So where do we go from here? There is no telling how much more the specs want to sell further. The last CFTC report showed speculators at 4.5 million bales net long, index funds at 7.5 million net long and the trade at 12.0 million bales net short. Therefore, there are still plenty of spec longs that could potentially get liquidated, especially if technical support around 68.50 (Elliott Wave) and 69.00 (weekly chart) is taken out.
However, sooner or later this spec selling will run its course and then there will be no one left to sell, because the trade has no appetite to go futures short at these levels. When that happens there is likely going to be a void of selling into which the market will rebound. We are still bullish going into the second and third quarter but feel that lower futures prices are certainly possible in the short term. We still feel that the best way to play this market at the moment is via the July/Dec spread, since any rebound should be much more pronounced in current crop.
Plexus Cotton Limited
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