NY futures reversed course this week, as July fell 680 points to close at 84.92 cents, while December dropped 379 points to close at 85.36 cents.

After trading to an intraday high of 92.58 cents last Friday, for a gain of over 1300 points in ten sessions, the July rocket finally ran out of fuel and prices dropped about as quickly as they had been going up. July options expiration played an important role in this topping action, as some clever traders chose to abandon over 2Ά200 in the money 90 and 91 strike calls and exercised nearly 400 out of the money puts in the same strikes, setting the market up for a bearish reaction on Monday morning.

After the shorts were scrambling out of positions all last week, it was now suddenly the longs that found themselves on the run, reacting to negative price action and technical sell signals. Nevertheless, this price break came a bit too late for the many shorts that got squeezed out of the market during the two-week rally in early June, as open interest had been reduced to only 29Ά120 lots as of Monday morning. Open interest continued to drop this week and amounted to just 12Ά765 contracts before todayΆs session, or about twice the size of the certified stock. It will be interesting to see how the final days of the July contract play out and whether there is going to be a strong taker as has been rumored. With the futures market once again getting in the ballpark of cash values, it may well be that the longs will have the last laugh in this volatile July saga.

The US export sales report was surprisingly strong considering that prices were at such elevated levels last week and that there is not much cotton left for sale. Net sales for June/July shipment amounted to 71Ά000 bales, while commitments for shipment August onwards rose by 81Ά400 running bales. China accounted for nearly half of these sales with 74Ά300 running bales net. Total commitments for the current season now amount to 13.8 million statistical bales, of which 12.0 million bales have already been exported.

Although Chinese imports dropped slightly below their two-year average in May, they nevertheless remained very solid at 1.59 million statistical bales. For the first ten months of the current marketing year (August/May) Chinese imports have already reached 17.54 million statistical bales and at that pace it is quite likely that the current USDA estimate of 20.0 million bales will be surpassed by 0.5 to 0.7 million bales. This would further deplete available supplies in the rest of the world and keep prices well supported until new crop cotton hits the market in greater quantities. Given the fact that new crop is behind schedule in many places, we donΆt expect much price pressure to develop until November at the earliest.

However, the prospects for new crop have been greatly improving with additional rain in West Texas this week and a promising start to the Indian Monsoon. If the weather plays along, we could see world production above 117 million bales, whereas global consumption will probably struggle to climb much above 109 million bales. In other words, we are looking at a fourth season in a row in which production outpaces demand. Only by China absorbing these annual surpluses in the rest of the world, and then some, have world prices been able to stay above their long-term average.

Comments by Fed Chairman Bernanke rattled markets this week, prompting hedge funds to trim their commodity holdings. What spooked traders were hints by the Fed that it may curb its bond-buying program if economic growth were to pick up and the labor market were to improve. However, it is quite a stretch to assume that the economy would be strong enough to stand on its own legs without all the trillions of dollars the Fed keeps throwing at it. The balance sheet of the Fed has been growing from 0.8 to 3.4 trillion dollars since late 2008 and there is hardly any real economic growth to show for it. Imagine where the economy would be without all these extra Fed dollars! We therefore believe that all this jawboning by the Fed is simply an attempt to manage expectations, since the Central Bank has pretty much run out of all other monetary options. We therefore expect that markets will calm down again soon and that weΆll be back to business, i.e. money printing, as usual.

So where do we go from here? We believe that timing is everything in this market and that we need to look at every futures month in isolation when making trading decisions. July is almost done now as open interest is probably below 10Ά000 lots after todayΆs session. There may still be some surprises left as we head into the notice period, but it will be played out on a minor stage. December is governed by a lot of the same dynamics as July, as supplies will get even further depleted over the summer months and early new crop supplies will be eagerly sought after. We therefore see it difficult for December to come under too much pressure. March, May and July are an entirely different story, since not only will supplies be more abundant as we head into 2014, but by then we should also know what the new Chinese cotton policy looks like. It is probably going to be bearish for global cotton prices; the question is just to what degree and on what time scale! The net result will likely be a gradual shift of global ending stocks from China back to the rest of the world over the coming seasons. Therefore, while December should remain relatively well supported until it expires, we could see some pressure build on March and later deliveries. In other words, we see the potential for December to invert substantially above March and would therefore advise to use the latter for short hedging purposes.

Best Regards