NY futures had another mixed week, but this time it was July that was up by 368 points to close at 84.48 cents, while December dropped 70 points to close at 78.72 cents.

The July contract, which had its First Notice Day today, is going out on a strong note, reflecting the extremely tight statistical situation we are currently in. The fact that the majority owner of the certified stock is not only keeping what’s left of his inventory, but is adding more by owning around 70% of the remaining longs in the July contract, is certainly a sign of strength.

Since there is only a limited amount of open contracts remaining in July, it is not likely that we will see any last minute fireworks. After accounting for the 476 notices that were issued for today, there were only 1’901 contracts or 190’100 bales open in the July contract as of this morning and this number has probably been reduced further during today’s session. Because the sole issuer of these notices has previously taken delivery of over 2’900 contracts, no one seems to be caught on the wrong foot entering this delivery period and it is now simply a matter of some certified stock changing ownership.

We believe that there is only one large Merchant in control of most of the 490’639 bales of certified stock that remain at this point and since there is no incentive to hang on to this cotton due to the steep inversion to December, it is probable that the entire lot will disappear over the next couple of months. It would indeed be a great side effect of this bull market to see the entire certified stock being disposed of, since it has accumulated a bunch of undesirable bales over the years.

The same is true for the cash market, as merchants have been busy pushing their remaining inventories out the door in light of the inversion that exists in the physical market as well. The forward A-index, which calculated at 87.10 cents today, is substantially lower than the current crop A-index, which was last quoted at 95.70 cents on June 22 and has since been discontinued due to a lack of suitable offers. Unless the case can be made that hanging on to a position will yield a higher price a few weeks from now, it makes more sense to get rid of the position in order to stop the carry.

The US serves as a prime example. Although there can’t be much old crop cotton left for sale, US shippers are not holding out for potentially higher prices and are cleaning house before new crop starts hitting the gins. Last week’s US export sales were once again quite impressive at 84’400 running bales for prompt shipment and 174’400 running bales for shipment August onwards. Total sales for the current season now amount to 13.5 million statistical bales, whereof 10.4 million have so far been exported, while commitments for the coming season currently stand at 2.2 million statistical bales.

The market seems to be able to ‘save’ itself into new crop, where supplies will initially be plentiful with the arrival of the Northern Hemisphere harvest. However, if the current statistical outlook for the coming season proves to be more or less accurate, we are likely to find ourselves in a similar or worse predicament by next spring or summer. Although there is not much volume traded yet in the July and December 2011 contracts, there already exists an inversion of 400 points between the two and we get the feeling that the next edition of the July/Dec spread may not end as benign as this year.

We are seriously questioning whether global ending stocks at the end of July are really going to amount to 49.6 million bales like the USDA currently suggests. We are particularly suspicious of the 18.6 million bales that China is supposed to have, considering the red-hot domestic market that pays prices of over 125 cents at the CNCE. The same goes for India, which is supposed to have 7.5 million statistical bales (9.6 million local bales) in inventory at the end of next month. It seems to us that global stocks are quite a bit lower than 50 million bales and that basically all of these stocks will be committed a month from now.

So where do we go from here? In an odd way the current inversion between current and forward values has discouraged hoarding and has helped to push remaining inventory into the marketplace. Although we will end this season with virtually nothing left for sale, the market seems to be focusing on the arrival of new crop, which is expected to gain momentum within a couple of months. Growers are expecting decent yields, which combined with the current high price level should produce nice profit margins, while merchants are eager to fill their offer sheets again. This has led to active forward contracting and the associated selling of futures by the trade, against which speculators have been accumulating long positions. The trade still seems to have plenty of ammunition on the short side, especially if the market were to move above the 80 cents level, while speculators are becoming more reluctant to add to their longs since upside momentum has been stalling. We therefore believe that the market will face strong resistance above 80 cents, but we equally feel that there will be strong support in the mid-70s due to the ongoing tightness. If the market were to drop, grower selling would stop while mills would become more aggressive in booking their requirements. We therefore don’t see the market going anywhere in a hurry and our best guess is for December to stay in a relatively tight range between 76 and 82 cents.

Best Regards