NY futures on the upside this week

13 Feb '10

6 min read

Speaking of stocks, the USDA now predicts that ending stocks outside China will be no more than 33.8 million bales by the end of the season. This compares to 40.1 million a year ago and 42.2 million in 2007/08. There is no doubt that stocks will be very tight by the end of July and we need to remember that mills depend on these stocks in August, September and October to tie them over to new crop. Further, let's not forget that even though the USDA has "found" more stocks in China going back a couple of seasons, the reality is that China will also be drawing from these low foreign stocks over the next six or seven months.

So where do we go from here? By flushing out the spec net long position over the last five weeks and by advancing US export sales by about 2.5 million bales during the same time frame, the market has actually become a lot more bullish. Not only have we seen a tightening of the US balance sheet, but the trade has also lost its counterpart in the market, at least temporarily. We therefore need to ask ourselves who is going to provide the shorts from here on forward, although in this regard we need to make a distinction between current crop and new crop.

The trade will most likely be a strong net buyer of current crop futures until July expires about four months from now, for reasons already explained. Speculators, who just fell into a bear-trap, will also be more inclined to approach the market from the long side, while index funds will probably remain relatively passive.

Since we expect there to be an imbalance between buyers and sellers in the second and third quarter, prices will need to rise to a level at which new shorts can be tempted. However, with traders attuned to the potentially explosive nature of current crop, it will take quite an incentive to lure shorts back into the market.

New crop is a different animal, as growers may want to price some of their new crop plantings and merchants are probably willing to build new basis-long positions for the coming season, which may lead to new hedge shorts in December.

While current crop futures may need a few more days to consolidate their recent gains, we believe that they will eventually continue to advance. We further believe that the inversion between current and new crop will continue to expand and we therefore recommend holding on to the July/Dec spread.

Plexus Cotton Limited

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