Are cotton futures heading for one their pre-expiry price spikes?

The market has a rich history of short squeezes driving futures sharply higher as contracts approach their demise, and trading volumes fall, leaving prices particularly vulnerable to volatility.

And there is some idea that New York’s December contract, which expires on December 6, could be vulnerable to such a fate.

‘Market to see new highs?’

What is causing comment is data on so-called “on call” cotton, ie that to be priced against futures, which showed more than 20,000 contracts in purchases still to be fixed against the December lot.

“This could support the contract, especially on dips,” said Louis Rose at Rose Commodity Group.

Trading house Ecom went further, underlining that “what is known is that 20,000 futures contracts need to be bought by the mills.

“We could see a short squeeze instigated by the specs as a way for the market to see new highs.”

‘Basis bids are strong’

As an extra potential kicker to prices, “if some of the biggest spec traders decide to try and push the market higher to set off mill stops” - ie automatic buy orders, set in this case above current values - “then it could see a pop above 71 cents a pound and even possibly up to 73 cents a pound”.

At McCleskey Cotton, Ron Lee flagged cause for support for cotton prices from tightness in the US physical market, saying that “it certainly seems that some merchants are short cotton and possibly running behind on their obligations to their mill customers.

“When we invoice cotton, it is getting a shipping date almost simultaneously and when we sell bales, the basis bids are strong and even stronger if we can ship it tomorrow but preferably yesterday.”

And Mr Rose noted a quality factor, saying that “low micronaire cotton” – ie rating low in fibre fineness and maturity – “coming out of west Texas could be partially responsible for the market’s current unwillingness to move lower”.

‘Snowball effect’

Not, is has to be said, that bulls hold all the cards, with an apparently large fund long position in cotton derivatives posing risk of fuelling a price tumble.

“Around the options expiry we would expect some volatility to hit the December contract as 61,000 long contracts start to liquate or roll their positions out of December futures,” Ecom said.

“If the big guys start to move their positions then it will create a snowball effect to the downside,” the trading house said, adding that “it should be an interesting next few weeks”.

And Mr Lee also reminded of the sizeable US harvest expected this year, saying that “we likely have a 20m+ bale crop here in the US to work through”.

‘Real chance to catch fire’

Indeed, “the size of this crop should keep prices contained over the next few months,” Mr Lee said, casting some doubt over the potential for spike in December futures after all.

Still, there is always the next opportunity.

“We are starting to pay attention to the December 2018 contract, one that I feel has a real chance to catch fire in due time, especially if plantings back up here in the US next spring,” he said.