NY futures collapsed further this week, with July dropping another 1549 points to close at 152.02 cents, while December gave up 556 points to close at 126.58 cents.

Current crop futures were looking in vain for buyers this week, as most mills remained withdrawn from the market. The A-index fell an astonishing 4625 points in just five days, reflecting the extreme pessimism that is currently prevailing in the physical market. With hardly any demand in the cash market at the moment, anyone who has a long position to protect is forced to turn to the futures market, which is why there has been such relentless price pressure lately, especially in the July contract.

However, the May/July spread has maintained a ‘bullish’ appearance despite the strong downtrend, because trapped May shorts are being forced to roll out to July at a stiff inversion. Allenberg, who is firmly in control of the long side in May, is apparently only letting a small amount of shorts out every day. As of this morning there were still 5’350 contracts open in May, which means that over the last three session only 1’239 contracts managed to get out. With Allenberg owning the remaining longs as well as over half of the existing certified stock, anyone who is still short may be in a predicament. There is not nearly enough certified stock outside of what Allenberg owns, which means that most of these shorts will be forced to pay their way out via a costly May/July spread.

Could the same happen again in two months from now when the July contract goes off the board? We believe so, especially if July is in the vicinity of where physical prices are trading. The July/Dec spread has collapsed from an inversion of about 90 cents in early March to currently around 25 cents, which is not much more than what the May/July spread is going for.

Although mills have been holding out for lower prices, they still need to buy quite a bit of cotton before new crop arrives and therefore July seems to deserve a certain premium over December. How much of a premium remains to be seen, but we seem to be getting closer to the point at which the July/Dec spread refuses to go lower. Therefore, if December holds steady due to the uncertainty surrounding new crop plantings and the July/Dec spread stabilizes, it will translate into support for the July contract. Today we seemed to get the first indication that this is starting to happen.

Although it is too early to cry wolf regarding US new crop plantings, the current situation does not look very promising. While West Texas and parts of the Southern Delta are experiencing drought conditions, the Northern Delta has one its worst floods in decades. Under the best-case scenario we will have a slightly delayed crop, while in the worst case some of the acreage will fall victim to drought or flood and overall yield potential will get compromised.

Lubbock has received less than an inch of rain since January, which compares to over 10 inches at the same time last year. What West Texas urgently needs is a system that dumps 3 or 4 inches of rain, because a few thunderstorms here and there won’t do the job. There is still time, but the optimal planting window is beginning to close. The same is true for the Delta, where dry whether is needed to allow soggy and flooded fields to drain. Unfortunately another system is expected to bring more rain on Sunday.

So where do we go from here? Although physical demand is still nowhere to be seen, there are some hopeful signs that support may not be far off. New crop futures should hold given the current weather situation and this in turn should help out July. Once mills are seeing some stability in NY, they may finally step forward and start fixing some of their remaining 2.7 million bales in on-call sales. Also, after open interest has dropped by some 45’000 contracts over the past three weeks, a lot of the liquidation seems to be out of the way for now and traders will become more cautious in selling the market below 150 cents. And then there is the US dollar, which continues to get hammered and that should also lend some support to commodities.

Best Regards