NY futures continued to slip this week, as July gave up 126 points to close at 85.48 cents, while December dropped 58 points to close at 85.08 cents.
The futures market remained under pressure as hedge funds continued to exit commodity positions. According to the latest CFTC report, speculators were 7.3 million bales net long as of April 9, down by 2.5 million bales in three weeks, and over the last ten days this position has probably been reduced further. This exodus by the spec sector has given the trade an opportunity to reduce its net short position, although it was still rather large last week at 14.4 million bales.
While the futures market was going up, it proved difficult for merchants to sell their basis-long positions (long physicals/short futures), because the futures market was constantly running ahead of the cash market. Now, with the market trending lower, the basis is strengthening again, which should allow shippers to finally dispose of their basis-longs in current crop. There is a sense of urgency to do so, since the futures market is still not offering any carry to hold on to cash positions beyond July and the outlook for new crop isn't really bullish at this point. Trade activity should therefore pick up, as mills still need to buy plenty of cotton for the second and third quarter, while merchants are keen to clean out their current crop inventory. This should lend some support to the futures market, since the sale of basis-long positions involves the buying back of futures.
Today's export sales report was once again surprisingly strong, as 226'200 running bales of Upland and Pima were sold for the current marketing year, plus an additional 36'000 running bales for shipment August onwards. For the second week in a row China was the main taker with 125'100 running bales net, followed by fifteen other buyers. Shipments were excellent as well at 423'000 running bales, with 227'200 bales going to China. For the current season total commitments now amount to 12.4 million statistical bales, of which 9.2 million bales have already been exported.
However, this constructive export sales report wasn't enough to reverse the market's bearish mood, which was further exacerbated by stories about the impending release of Indian and Chinese government stocks. The Cotton Corporation of India is said to tender 250'000 bales to the domestic industry on April 26, with further quantities to follow in the months ahead, which will likely reduce the need for imports.
In the case of China, yesterday's announcement about government sales auctions was more of a policy clarification than any shocking new revelation. Unless China drastically lowers the price at which these Reserve stocks are made available, they don't really pose a threat to outside markets. In fact, by rewarding mills that buy domestic cotton with import quotas, on a 3-to-1 ratio, China will continue to absorb cheaper stocks from the rest-of-the-world, thereby acting in support of world market prices.
