NY futures traded mixed this week, as July dropped 115 points to close at 93.05 cents, while December gained 13 points to close at 83.51 cents.

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasnΆt able to maintain enough upside momentum to keep this breakout attempt going and was eventually forced to pull back into the 90 to 94 cents range, where it has spent most of its time trading since early March.

WhatΆs remarkable is that open interest in the spot month has continued to increase, even though there are only about 6-1/2 weeks left until July enters its notice period. There are currently over 122Ά000 contracts still open in July, more than in any of the previous five seasons at this date. Obviously neither spec longs nor trade shorts are inclined to exit their positions at this point, although considering how little US cotton remains available, the specs seem to hold the stronger hand in this game.

The trade is obviously trying to force the market down, be it by using the certified stock as a deterrent or by spreading rumors about impending export cancellations. While the certified stock may ultimately be able to collapse the inversion between July and December, unfortunately most of the current shorts wonΆt be around to benefit from it. Traders wonΆt know until the notice period whether the certified stock is actually going to be in play or not, and by then nearly all of the 12.2 million bales in open interest will already have been liquidated.

Rumors of US export sales cancellations proved to be just that, as last weekΆs export sales handily beat expectations with net new sales of 66Ά900 running bales for May/July shipment and another 152Ά500 running bales for August onwards. Shipments were once again strong at 227Ά200 running bales, thereby lowering the amount of outstanding commitments to just 1.68 million bales. We still maintain that we wonΆt see any significant cancellations in the weeks ahead based on whom these remaining commitments are owed to!

Export commitments for the current marketing year now amount to 10.2 million statistical bales, of which 8.4 million bales have so far been shipped. Commitments for the 2014/15-season are at 1.75 million statistical bales and we believe that at least 1.0 million bales of these sales will be supplied from existing inventories. In total we estimate that around 15.8 million bales in export and domestic commitments will be supplied from the 16.8 million bales that were available this season, leaving just some 1.0 million bales for sale at this point, including the 0.4 million bales of certified stock. This is definitely one of the tightest US balance sheets we can remember!

TomorrowΆs USDA supply/demand report, which provides a first look at the 2014/15 season, will probably cause some excitement and kneejerk reactions, with many traders expecting the report to have a negative bias due a further rise in global ending stocks to over 100 million bales. However, as many traders have learned the hard way over the last three seasons, a high global ending stocks number does not necessarily translate into lower international cotton prices, as long as the rise in inventory occurs in China.

Over the last 3 seasons Chinese ending stocks have gone from 10.6 to 58.8 million bales, for an increase of 48.2 million bales. During that same time frame ROW stocks have gone in the opposite direction, dropping by 1.7 million bales, from 39.8 to 38.1 million bales.

The coming season is expected to bring some relief to the tight ROW stock situation, but it may not be as much as some of the bears are counting on. LetΆs assume that world production were to surpass mill use by about 3.0 million bales and letΆs further assume that China had a production deficit of 8.0 million bales. This would result in a ROW production surplus of 11.0 million bales. If Chinese imports were to remain stronger than expected next season, letΆs say at 9.0 million bales, then ROW ending stocks would increase by merely 2.0 million bales to 40.1 million bales.

While this would offer some improvement, we donΆt think that it would be enough to depress prices in any meaningful way. For that to happen we would either need to see above average ROW production, lower mill use or fewer Chinese import, or a combination of the three. However, the way it looks at the moment there are plenty of issues on the production side (Texas, Australia, Indian monsoon), while China doesnΆt seem to shut its door to imports anytime soon.

So where do we go from here? TomorrowΆs USDA report will obviously give traders something to talk about, but we need to remember that the government doesnΆt have a crystal ball either and is guessing like the rest of us. There is no denying that the current supply/demand picture is extremely tight and this will likely remain the case until new crop cotton starts to fill up the pipeline between November and February.

With the forward A-index closing the gap to the spot quote (91.25 versus 93.80 cents), cash prices seem to be well supported through the early part of next season, which should keep the futures market on a relatively firm footing. Sure, one could argue that July futures are currently about 3-4 cents overvalued compared to theoretical cash values, but with available US supplies down to the last million bales and with premium machine-picked cotton getting scare, this premium may be justified. Having said that, we have no firm opinion on July and prefer to stay out of it!

However, we still like December, which at a nearly 800-point discount to the forward A-index looks attractive, especially if the drought in West Texas continues.

Best Regards