New York futures came under renewed pressure this week, as December gave back 113 points to close at 65.45 cents.

Although December traded in a relatively tight range of just 161 points in this holiday-shortened week, it was able to move back above the March contract for the first time in three months. The two front months are governed by vastly different fundamentals, as December reflects the tight transition period that is likely to persist until its expiration, while March continues to feel the pressure from a decidedly bearish outlook for 2015.

The Dec/March spread has moved from 90 points carry to a 35-point inversion in less than three weeks and this inversion is by no means confined to the US market, as just about everywhere we look there is a stark contrast between prices for nearby and deferred shipments.

The most dramatic price differential exists in China at the moment, where the ZCE futures contract for September rallied to over 17Ά400 yuan/ton today (128 cents/lb), which is more than 2Ά600 yuan/ton (19 cents/lb) above the November contract and over 3Ά400 yuan/ton (25 cents/lb) more than January delivery.

Brazil is another origin that has seen its basis for nearby delivery strengthen considerably, as merchants and mills are scrambling to meet shipping deadlines and new export demand. Logistical delays as well as quality issues in Bahia have apparently made it more difficult get this crop moving.

We feel that the market has been misjudging the speed at which this potential bear market is expected to unfold. Looking at the statistics, which show an increase in ROW stocks of over 10% and global inventories in excess of 105 million bales, it is understandable why traders have been so frantic in pushing prices to their lowest level in five years.

However, as the market is finding out, it may take more time than anticipated to fill this nearly empty supply pipeline, as growers are quite reluctant to sell at these depressed levels. Furthermore, some origins have price support mechanism in place, like the US and India for example, which may defer price pressure into early next year.

Another factor to consider is the weather. Although most Northern Hemisphere crops are getting close to harvest and the size of the crop is probably not going to vary by much anymore, wet weather could still affect quality and delay the crop movement by several weeks. Weakening El Niño readings in August have allowed the Indian Monsoon to make a strong comeback, but they have also set the stage for an active finish to the hurricane season in the US, which could impact crops from Texas to the Southeast during September and October.

Climate prediction models expect El Niño to gain strength over the winter months though, lasting through the first half of 2015, which would be excellent news for drought-stricken California and the US Southwest, possibly setting the stage for another decent cotton crop in West Texas.

Last weekΆs CFTC report confirmed that speculators were swapping their short positions with the trade during the marketΆs recent run towards 68 cents. During the week ending August 26, the trade had increased its net short position by 0.7 million to 4.0 million bales, while specs reduced their net short holdings by 0.6 million to 1.4 million bales. On the other side of the ledger we have index funds with a 5.4 million bales net long position. Although the trade has made some progress in increasing its net short position, it remains considerably underhedged given the size of the various Northern Hemisphere crops that are about to hit the market.

So where do we go from here? The market seems to be stuck in the middle of nowhere at the moment, as traders are not willing to sell December below 64 cents given the nearby supply constraints, while spec short covering has fizzled out due to a lack of upside momentum. TodayΆs volume of less than 10Ά000 lots has been the lowest since July 23 and is indicative of the marketΆs lackluster mood. Although traders may shy away from shorting December at this level, they feel confident to do so in March and May, which has been fueling the inversion and this dynamic is likely to continue. The market needs fresh impetus to get it out of its rut, which is likely to come from the weather front and/or the Chinese subsidy announcement. In the meantime we donΆt see an easy escape from this dull sideways pattern.

Best regards