By Jeff Thompson, Autauga Quality Cotton 

As if shot from a cannon, cotton prices skyrocketed last week with both current and new crop futures setting contract highs. Most active were May futures which broke out of two-month trading range to close limit up on Friday at 135.90, a ten-year high and a gain of nine cents on the week.

Not to be ignored, December futures reached 112.57 before settling at 111.74 advancing six and a half cents on the week. One should note, the all-time high for a December contract is 1.57 in 2011. 

Who lit the fuse? As we suggested in our last Market Review, managed funds are responsible. The latest Commitment of Traders report reflecting activity in the Tuesday-to-Tuesday week ending March 22 confirmed the funds increased their net long position for the first time in seven weeks. Consequently, in the same Tuesday to Tuesday week, May futures gained eleven cents.

With the addition of 723,000 bales, their net long position now stands at 7.4 million bales still shy of the 9.7 million in October of last year. With May futures gaining over five and a half cents since last Tuesday, it’s a good bet the funds are still adding to their longs .

Also contributing to the rally is a large volume of out of the money call options purchased by traders last week. No doubt these individuals are extremely bullish foreseeing another 2011. But the immediate effect is it creates buying pressure since those selling the options need to hedge the market by buying an equal number of futures.

Lastly, over eight million bales of on call sales remain based May and July. This will supply valuable support as mills will take advantage of any dip in the market to price cotton.

The return of speculative money is being prompted in part by favorable cotton fundamentals, strong demand, and prospects of shorter supplies. Weekly export sales, though off slightly from those previous, were respectable at 378,000 bales combined. Better yet, shipments hit a marketing year high of 453,500 bales, a promising sign supply chain issues may be easing.

Another enticement for big money, cotton, along with other commodities, provide a hedge against inflation thus encouraging their shift from securities to something physical. Though this return is certainly welcomed as it drives futures prices higher, we are beginning to see early signs the cash market cannot keep pace.

There has been word some larger mills in India and China are cutting back production with margins squeezed at these lofty prices. This should set off alarms as such a disconnect could be the pin in the balloon – remember 2008.

Where to from here? Without question, at current price levels, we are in uncharted waters. Even scarier, specs are at the wheel, and they can be a fickle bunch. As May futures continue to mirror that of 2011, it will pull December futures with it for now.

As we all know, spec money can give futures a life of their own, but fundamentals will prevail in the end. Thus, the top will be when prices exceed what the mills can pass along, and demand begins to shrink. So, be very risk conscious going forward.

Take note of two reports this week. USDA releases their planting intentions numbers on March 31. We expect it will fall in line with those of NCC at around twelve million acres. However, do not be misled for in no way will planted acres equate to harvested acres in 2022. Finally, all eyes will be on Thursday’s export sales numbers for any sign of tapering demand.