NY futures had a mixed performance this week, as March dropped 155 points to close at 81.40 cents, while new crop December gained 123 points to close at 82.38 cents.
With the trade throwing everything but the kitchen sink at the short side, including another 66’000 bales of certified stock, the spot month finally began to correct this week and carrying charges continued to reappear. This created a seesaw effect on the board, as March dropped 155 points, while May (down 87) and July (down 39) suffered only minor losses and December (up 123) climbed to a new 8-1/2 month high today.
As the latest CFTC report as of January 29 shows, the trade has further increased its already sizeable net short position by adding another 18’719 contracts, which brings the overall net short to 14.85 million bales. We have to go all the way back to the week of September 14, 2010 to find a bigger trade short. On the other side of the equation we have speculators (7.47 million bales net long) and index funds (7.38 million net long) with almost identical positions. Since index fund holdings are purely a function of money flows, the “market driven” positions between spec longs and trade shorts are currently at a 1-to-2 ratio.
The trade has been backing up its large bet by increasing the certified stock quite considerably in recent weeks. As of this morning it measured 233’548 bales (including bales under review), the highest level since May 2011. Just over the last ten days the certified stock has more than doubled! In beefing up tenderable supplies, the trade is trying to achieve two objectives, namely to safeguard its large futures short position and to force carryings back onto the board. So far the strategy is succeeding, although it comes at a price!
The larger this trade short position grows, the more support it creates downs the road, because these shorts will eventually have to be bought back. That will occur when basis long-positions get sold and when mills finally fix the 3.75 million bales that are still open on March, May and July. Further, we have to assume that some of these nearly 15 million bales in net trade shorts are of speculative nature, since the amount is simply too large to just represent hedges against unsold cash positions and on-call sales at this point in the season. By the way, the vast majority of these positions are in current crop, because open interest in new crop December and beyond amounts to less than 1.5 million bales at this point. In other words, the trade has to unwind a lot of positions over the next four months!
The US export sales report of this morning was a mixed bag, as sales clearly slowed down last week in reaction to higher prices, and China was once again missing in action. However, there were still 16 markets participating in buying 143’800 running bales of Upland and Pima cotton last week. Shipments of 455’000 running bales, a marketing year high, were also very impressive. For the season total commitments now amount to 10.5 million statistical bales, whereof exactly half or 5.25 million bales have so far been exported.
So where do we go from here? The correction we anticipated last week is now under way and the question is how far will it go? We need to watch out for a pickup in US sales and an increase in mill fixations as signs of support kicking in. Right now the US is still trying to regain its competitive edge, which currently belongs to India and various African origins. We still feel that the market will find solid support in the 78-80 cents area.
Speculators have so far held on or even increased their net long holdings, based on a further increase in total open interest to 214’167 contracts this week. The short-term uptrend, which saw the market gain ten cents since the last USDA report, was broken on Monday and has stalled upside momentum for now. However, we don’t expect speculators to bail out of their positions in greater numbers unless the market falls below 78 cents.
Tomorrow’s USDA report, coupled with options expiration and the Goldman roll, should make for an interesting trading session. The USDA supply/demand report shouldn’t hold any major surprises. We still have a two-tiered global market between high-priced China and a much more affordable rest-of-the-world. We need to watch out for any further tightening in the rest-of-the-world’s balance sheet, since it could provide the base for another jump in prices. However, for now we feel that the market will most likely remain in a 78-84 cents trading range, at least until we get past the March notice period.
