NEW YORK (Dow Jones)--The manner in which cotton is trading hands is raising
questions about the actual strength in underlying demand for the fiber.
Cotton prices have rallied 65% over the past year on the back of a rebound in
global demand for textiles. The nearby cotton futures contract, for May
delivery, on Monday settled 0.24 cent, or 0.3%, lower at 84.02 cents per pound.
The most actively traded contract, for July delivery, ended 0.31 cent, or 0.4%,
lower at 85.89 cents per pound on ICE Futures U.S.
Most cotton traders looking to manage price risk switch out of expiring
contracts into ones for delivery further in the future well before the
so-called notice period begins. However, those who trade in both futures and
cash, or physical, markets have more opportunities to book profits at a time
when cotton is perceived to be in short supply.
J.P. Morgan Futures Inc., on behalf of a customer, intends to transfer
ownership of 411,400 cotton contracts to eight different trading firms,
according to a notice issued late Friday by exchange operator
IntercontinentalExchange Inc. (ICE).
These contracts, each representing delivery of 100 cotton bales of 500-pounds
for May 2010 cotton contracts, are currently housed in storage facilities
certified by the exchange. While the cotton is changing hands, the volumes
remain in the warehouses. There is no indication they will be sold into the
physical cotton market.
"You've got a high-stakes game of musical chairs going on," said Sharon
Johnson, senior cotton analyst at First Capitol Group in Atlanta.
The fact that these cotton bales aren't really moving toward end users such
as textile mills is a signal that not all of the gains in cotton futures can be
justified by the tight global supply-and-demand situation.
Several traders said that J.P. Morgan notified ICE of the upcoming
"deliveries" on behalf of commodities giant Cargill Inc. Cargill declined to
comment on the transaction, but did confirm that J.P. Morgan does represent it.
Market participants said the bigger buyers were two well-known cotton
merchants.
Cargill's move to sell to other merchants rather than to mills surprised
observers, who noted that the company took ownership of a similar amount of
cotton in a similar manner earlier this year.
"Obviously, they were unable to [sell] the cotton and unwilling to carry it
forward at current differences," said Mike Stevens, an independent cotton
broker and analyst based in Mandeville, La. "The question now arises as to
whether the two major merchants who stopped 89% of the notices can do any
better."
Traders look to see who is "stopping," or taking cotton during the delivery
period, in order to gauge the strength of the market. A strong "stopper," or
buyer, is a bullish cue. Because the participants on both sides of this
transaction are major market players, it is more difficult for the broader
market to draw specific conclusions.
Cotton futures for July delivery are trading at a premium to May futures,
meaning that those firms who took cotton off Cargill's hands can still make a
profit. The difference is more than enough to pay warehouse fees until the July
contract goes into delivery on June 24.
Traders will look to the July delivery period to determine the market's
future direction. Demand for cotton may be stronger--and prices higher--in
July, analysts say. It remains to be seen whether merchants and mills may have
their immediate needs met and hope to hold out until December, when prices are
lower and the market is flush with freshly harvested 2010 U.S. cotton, Johnson
said.
The U.S., the world's biggest cotton exporter, is estimated to have harvested
12.15 million bales of cotton in the season that ends in July. That is nearly
as much as the 12 million bales the country is expected to export, U.S.
Department of Agriculture data show. However, world cotton consumption in that
timeframe is expected to outpace production by 14% as textile demand rebounds.
Indications of economic recovery are encouraging retailers to restock
dilapidated inventories as clothing and linens are among the first items cut
from tight household budgets, but also some of the first to return.
ICE daily cotton stocks increased by 14,599 500-pound bales Friday to total
991,179 with 31,174 bales awaiting review and 75 decertification orders,
according to exchange data.
ICE cotton open interest the number of active positions left at the end of
the session increased by 3,451 positions Friday to total 190,223, according to
the exchange.
Volume was estimated 13,415 lots. In options, approximately 4,471 calls and
6,498 puts traded on the floor, according to exchange data.
Close Change Range
May 84.02 -24 pts 83.69-85.10
Jly 85.89 -31 pts 85.41-87.10
Dec 77.60 +22 pts 77.23-77.65
