NY futures continued to slip this week, as July gave up 126 points to close at 85.48 cents, while December dropped 58 points to close at 85.08 cents.

The futures market remained under pressure as hedge funds continued to exit commodity positions. According to the latest CFTC report, speculators were 7.3 million bales net long as of April 9, down by 2.5 million bales in three weeks, and over the last ten days this position has probably been reduced further. This exodus by the spec sector has given the trade an opportunity to reduce its net short position, although it was still rather large last week at 14.4 million bales.

While the futures market was going up, it proved difficult for merchants to sell their basis-long positions (long physicals/short futures), because the futures market was constantly running ahead of the cash market. Now, with the market trending lower, the basis is strengthening again, which should allow shippers to finally dispose of their basis-longs in current crop. There is a sense of urgency to do so, since the futures market is still not offering any carry to hold on to cash positions beyond July and the outlook for new crop isnΆt really bullish at this point. Trade activity should therefore pick up, as mills still need to buy plenty of cotton for the second and third quarter, while merchants are keen to clean out their current crop inventory. This should lend some support to the futures market, since the sale of basis-long positions involves the buying back of futures.

TodayΆs export sales report was once again surprisingly strong, as 226Ά200 running bales of Upland and Pima were sold for the current marketing year, plus an additional 36Ά000 running bales for shipment August onwards. For the second week in a row China was the main taker with 125Ά100 running bales net, followed by fifteen other buyers. Shipments were excellent as well at 423Ά000 running bales, with 227Ά200 bales going to China. For the current season total commitments now amount to 12.4 million statistical bales, of which 9.2 million bales have already been exported.

However, this constructive export sales report wasnΆt enough to reverse the marketΆs bearish mood, which was further exacerbated by stories about the impending release of Indian and Chinese government stocks. The Cotton Corporation of India is said to tender 250Ά000 bales to the domestic industry on April 26, with further quantities to follow in the months ahead, which will likely reduce the need for imports.

In the case of China, yesterdayΆs announcement about government sales auctions was more of a policy clarification than any shocking new revelation. Unless China drastically lowers the price at which these Reserve stocks are made available, they donΆt really pose a threat to outside markets. In fact, by rewarding mills that buy domestic cotton with import quotas, on a 3-to-1 ratio, China will continue to absorb cheaper stocks from the rest-of-the-world, thereby acting in support of world market prices.

Just look at the most recent import data! According to customs, China imported 529Ά000 tons of cotton in March, bringing the total for the first eight months (August/March) to 3.04 million tons, which amounts to just under 14.0 million statistical bales. The USDA increased its estimate for Chinese imports to 16.5 million bales last week, which may prove to be conservative! The rest-of-the-world has a production surplus of 13.26 million bales this season, and it has taken China just eight months to absorb this entire surplus with its 14 million bales in imports!

So where do we go from here? With hedge funds in “switch off” mode, the path of least resistance is clearly down at the moment. Looking at the chart, there is not a whole lot of support before we get to 82 cents in July. This price level also makes sense from a physical point of view, given that it translates into landed Far East prices of around 93/94 cents, which is where US high grades have been selling. We therefore feel that the market has another 2-3 cents of downside potential, at which time both technical and physical support should kick in! Whether the next support level is simply a pause in a market trending lower or a base from which to attempt another move higher remains to be seen!