NY futures closed slightly higher this week, as May gained 65 points to close at 81.82 cents, while December advanced 72 points to close at 74.69 cents.
After May had posted gains of 1680 points (nearly 25 percent!) in a matter of just 15 sessions, it finally ran out of steam and we have since seen a mild correction from Monday’s high of 84.60 cents.
However, the change in open interest over the past few sessions indicates that this correction has not been caused by spec long liquidation, but rather by a void of buying near the recent highs. During Tuesday’s sell-off open interest jumped by over 5’000 contracts, which tells us that speculators continued to increase their long positions, while the trade and possibly some speculators established new shorts. This is important because it shows that speculators are not exiting the cotton market just yet and that the trade is still determined to sell into this trend.
Although some of this increase in open interest belongs to December, the majority of new bets are still put on in current crop futures. Since February 11, total open interest has been rising from 161’158 to currently 181’662 contracts, an increase of 20’504 contracts, of which just 8’101 were for December and later delivery periods.
What concerns us is that traders keep on selling into this powerful uptrend, believing or rather hoping that the market will sooner or later give them the break they are waiting for. The latest CFTC report shows that as of February 23 the trade had increased its net short position to 12.2 million bales, up by over 1.7 million bales from the week before. Index funds were 7.2 million net long (down 0.1 million on the week), while all remaining speculators were 5.0 million bales net long (up 1.8 million from the week before). Over the last two weeks the trade has added 3.2 million bales to its net short position, which makes it increasingly vulnerable to margin calls in case the market does continue to advance. At its current net short, the trade will have to meet margin calls of over 60 million dollars for every cent the market advances.
Although export sales have clearly slowed down in recent weeks, they are still decent considering that the US has only a little more than 5 million bales for sale. Today’s export sales report showed that for the week ending February 25th a total of 147’100 running bales of Upland and Pima found a home, which brings total commitments for the season to 9.5 million statistical bales, whereof 5.5 million have so far been exported. Shipments last week amounted to 293’600 running bales, a marketing year high, and we believe that the pace of exports will continue at a brisk pace since freight rates are set to increase in two months from now.
Today’s on-call report shows that many of these new sales still have their price open, as unfixed on-call sales increased by 306’700 bales net, bringing the total to 5.93 million bales. Open on-call sales on May and July increased by 185’000 bales last week and they now amount to 3.45 million bales, with just a little over three months to go to get them all squared away.
During this week’s ICA/Cotlook conference in Singapore, with over 400 attendees from the cotton trade, a couple of merchants presented a fairly bullish outlook on cotton prices, drawing the audience’s attention to the extremely tight statistical situation we are currently in, a situation that will possibly take more than just one season to remedy. Although many mills still seem to be fairly calm and collected at this point, we believe that this conference has created a heightened sense of urgency in regards to covering or fixing any outstanding needs between now and new crop.
So where do we go from here? Today’s close was slightly below the steep uptrend channel that has been in force since February 5th and we may therefore see a pause in spec buying or even some profit-taking. This may open the door for a correction down to 78-79 cents. Much will depend on where the trade will come in to support the market, but given that there is not much supply pressure at this point and that mills still need to fix and buy substantial quantities in the months ahead, we feel that there is going to be strong support once values dip below 80 cents. Given the large short position the trade still needs to deal with, we don’t believe that we have seen the highs of the season yet.
New crop is still anybody’s guess, but we agree with the notion that the tight supply situation from which we are going to emerge this summer will probably linger well into next season. There is not much margin for error in regards to the coming crop and if we can believe some of the long-range weather forecasts we may be looking at another challenging growing season.
Best Regards
