Spot cotton futures are on fire and now theyΆre starting to exert a strong “coattail” tug on new crop contracts as well. Southeastern mills are reporting the critical stocks of high quality “Memphis East” cotton are disappearing fast and some are even considering the extra freight cost of trucking cotton in from Texas.

The latest surge in old crop cotton futures had its genesis in concern about extremely tight supplies of certificated stocks eligible for delivery against short positions in futures. But over the last several weeks, those stocks have been rising steadily. But even after these increases, they are still the equivalent of only about 1,750 contracts versus open interest of about 80,000 contracts in the March. So if thereΆs a plan to “squeeze the shorts” by demanding delivery among commercial firms holding long positions, it still has some merit in the math.

Then thereΆs the fact that U.S. export sales are nothing short of sizzling in recent weeks, making high odds USDA will raise the export forecast again in the Feb. 10th WASDE report and cut ending stocks further. Only six weeks ago cotton sales YTD were up to 200,000 bales behind the pace needed to justify USDAΆs then-current forecast for 10.4 million bales in exports for 2013/14.

Then word got out that USDA had fined a major exporter $500,000 for failing to comply with export reporting requirements. Implication: Actual sales were substantially higher than those being reported in weekly USDA export sales reports. And sure enough, USDA actually raised its export forecast in the January WASDE to 10.5 million bales.

Cut to the present situation: Last weekΆs shipments set a marketing year high at 358,600 bales, up 18% from the previous weekΆs already strong movement and up 48% from the 4-week average. Sales YTD are now running more than 500,000 bales ahead of the pace needed to warrant USDAΆs current forecast.

Another important element is that China is still among the buyers of U.S. cotton, even though that country has announced it is ending its domestic price support policy that paid farmers over 50% more than world prices. Initially, that would seem to be bearish for prices in suggesting China would begin to offer its enormous reserves to domestic mills at competitive prices, crunching imports.

But others see the change as potentially bullish on two counts: ChinaΆs plan to shift to a target price and deficiency payment approach for farmers could result in sharply lower Chinese cotton acreage if those “target prices” are not much above current world prices and sharply below past years. Second, there is thought to be substantial “pent up demand” among Chinese mills who couldnΆt compete with imported yarn paying the government for domestic cotton at government-mandated premiums.

We noted in our closing comment yesterday that from a purely technical standpoint, todayΆs advance pushed the nearby cotton contracts above trendline resistance in place since January 21. That might trigger a fresh upward surge, especially if the Employment data proves supportive of the stock market. As it turns out, the employment was disappointing, but the DJIA took off anyway on ideas that the poor employment numbers might cause the Fed to slow or even halt the monthly cutbacks in “quantitative easing”.