NY futures advanced further this week, with December adding another 334 points to close at 89.49 cents, while March gained 316 points to close at 87.95 cents.
The market has now rallied an impressive 1648 points in a little over six weeks and there still seems to be no end in sight to this bull market. If anything it has become easier for the ever-increasing contingent of longs to force values higher, because trade shorts seem to be running out of bullets as margin calls have eaten up a substantial amount of their available credit. When this rally began on July 20, the trade had a net short position of 8.3 million bales, which has grown to 14.9 million bales as of last week. On an average short position of 11.5 to 12.0 million bales, cumulative margin calls would have amounted to nearly a billion US dollars over the last six weeks, which is a lot of money even for merchants with deep pockets.
The trade is not only limited in terms of cash at the moment, but physical stocks are about as tight as we have ever seen them, which means that there is no imminent threat from deliveries to the board that might scare speculators out of their long positions. Even if there was cash cotton available, it is questionable whether it would end up on the certified stock, since prices paid by mills are currently at or above the futures market. It is truly amazing to see at what level physical cotton is trading these days. What started last year in China, with domestic prices going beyond 1.30 dollars/lb has now spread to Brazil, where local prices have spiked above 1.20 dollars/lb over the past few weeks. Mills all over the world have woken up to the fact that supplies are once again going to be very tight this season and as a result we have seen a mad rush to cover requirements well into next year.
What makes the current bull market so different from the ones we have experienced in years past is that mills are seemingly still able to digest these higher prices. In other words, the threshold at which prices are starting to ration demand seems to be a lot higher this time around. We are not quite sure why that is, considering that we are still in a recession in many consumer markets. It may be due to a combination of factors, such as increased productivity, a weaker US dollar, cheap financing and stronger than expected local demand in emerging markets. However, with landed prices for high-grade cotton now at over a dollar, we would not be surprised to finally see some rationing of demand over the coming months.
US export sales continued at a decent pace last week, as 269’800 running bales of Upland and Pima were sold to 21 different markets. For the current marketing year we now have total commitments at 7.2 million statistical bales, of which a little less than a million has so far been shipped. This is nearly half of what the USDA currently projects for the entire season and we are only one month into it. Again most of these sales were made ‘on-call’, as mills continue to hope for price breaks down the road. Last week on-call sales increased by another 265’500 bales net and they now amount to a total of 9.4 million bales. In contrast unfixed on-call purchases are relatively insignificant at just 1.3 million bales.
Mills who have bought cotton ‘on-call’ and the many other shorts in the market are pinning their hopes on a speedy harvest, hoping that it might put some pressure on the market. The US crop seems to be slightly ahead of schedule at this point as defoliation is gaining momentum in the Mid-South and Southeast and pickers are starting to become active. The West Texas crop is still a bit further off and we don’t expect its harvest to be under way before the middle of October. All of these crops are still vulnerable to adverse weather over the coming weeks, which should keep potential sellers at bay for now.
So where do we go from here? The current uptrend has a lot of momentum and is supported by both technical and fundamental factors. This is attracting additional spec longs and is overwhelming the trade’s ability to keep up on the short side. Our worry is that at least some of these trade shorts may get flushed out, which would add additional fuel to the rally. We are already seeing some protective moves by the trade, be it by buying calls or call spreads or by buying back short futures and replacing them with puts. At the moment we simply see no opposing force strong enough to halt this trend and we therefore expect it to continue. Once the Northern Hemisphere crops are harvested, the trade may regain control of the board by increasing the certified stock, although we would expect any corrections to be fairly well contained given the tight statistical situation and the large unfixed on-call position.
Best Regards
