For the week ending Friday, November 4, ICE cotton futures reversed course in dramatic fashion.  From the three cent limit down settlement on Friday, October 28, the Dec’22 coiled up like a spring on Monday, gapped up the three cents limit on Tuesday, continued four cents limit up on Wednesday and again on Thursday (see chart above courtesy of Barchart.com).  On Friday the Dec’22 contract settled up 3.93 cents at 86.93 cents per pound, while the Dec’23 settled at 78.37 cents.  Chinese cotton prices and the A-Index were more mixed across the week.

The explanation for this week’s price action is short covering.  As of Tuesday, November 1, the hedge fund speculators had built an outright short position of 52,319 contracts, the largest such position since April, 2020.  The combination of bullish Chinese economic news (i.e., relaxing their covid restrictions), technical buy signals, and limit up market reactions (with even higher prices reflected in the options market) induced speculative shorts to buy back their positions.  First Notice Day for the Dec’22 contract is November 23.  Any remaining discrepancy between undervalued cotton futures relative to cash cotton prices should be eliminated, and the result is that remaining speculative shorts may get squeezed as they try to exit their position.  It remains to be seen where the new equilibrium price level will be when the short covering and squeeze dynamics are past.  By itself, it doesn’t strike me as a recipe for sustained higher prices back to, say, over a dollar.  But, it remains to be seen.

Speaking of which, cotton-specific influences this week included a continuation of very light-to-moderate demand in inactive/slow physical trading. Weekly export sales were stronger while actual export shipments remained sub-par level.  U.S. harvest both progressed ahead of  the historical pace, despite rains from eastern Texas to the Delta.

The pattern of ICE cotton futures open interest was mixed this week, while price settlements were higher.  The regular Tuesday snapshot of speculative positioning (through November 1) shows the peak of the build-up of the hedge fund net short position:  1,083 more hedge fund longs and 490 new index fund longs, week over week, both of which were outweighed by 7,860 new hedge fund shorts since the prior week.  We will have to wait until next week’s report to see the scope of the short covering that happened.

In contrast to ICE cotton, CBOT corn futures trended lower, CBOT soybean futures was somewhat higher, and KC hard red winter wheat futures had a sideways/mixed pattern of price settlements. The U.S. dollar index trended up all week before retracing most of the way back down on Friday.

For more details and data on Old Crop and New Crop fundamentals, plus other near term influences, follow these links (or the drop-down menus above) to those sub-pages.