The dynamics in the December contract are entirely different. The outlook for a much bigger crop next season, not just in the US, but globally, is going to provide a lot of hedge selling over the coming months. Even though it is a tall order for world production to catch up to global mill use (estimated at 118 million bales), we may see it happen. Growing conditions in the Northern Hemisphere seem to be ideal after a very cold and wet winter, promising low abandonment numbers and high yields. West Texas growers are particularly enthusiastic after receiving up to 10 inches of rain since the beginning of the year. Once the seed is in the ground, growers and coops will want to lock in at least part of their expected crop at the current high price level or use bearish options strategies to seek downside protection. Mills on the other hand are not expected to book a lot of forward cotton at these prices, at least not on a fixed price basis, which means that there is not much to counterweigh grower selling until prices move lower.
So where do we go from here? July looks well supported at the moment as trade shorts are covering, while December will face a lot of resistance from grower selling from here on up. This should keep the steep inversion alive for the time being, although we would not be surprised to see the spread collapse as we approach the final days of July. Again, it is all a matter of timing and with so many open positions yet to be dealt with it promises to be a very volatile affair.
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