New York futures advanced this week, with December gaining 146 points to close at 64.50 cents/lb, while March moved up 114 points to close at 63.02 cents/lb.
Persistent spec buying lifted the December contract to a high of 66.04 cents this week - its highest level in six weeks – but increasing trade pressure and a selloff in the grain markets weighed on prices in the final hours of Friday’s session.
The recent strength in the grains markets, which saw corn rally as much as 18% in October and soybeans 15% before reversing down today, seems to have spilled over into the cotton market, as a number of speculators decided to cash in their short bets.
“Speculators typically put their money into trending markets that promise a decent return and they don’t have a lot of patience to stay in a position when prices move sideways or reverse course,” the latest Plexus market report informs.
The cotton market has been flat-lined since the beginning of August, when December’s precipitous decline came to a halt at 62.00 cents.
For the last three months the spot contract has been meandering between 60.83 and 68.48 cents, testing the nerves of speculators, who as of last week held about 5.8 million bales in outright longs and 7.5 million bales in outright shorts.
When December broke out of a triangle formation earlier this week and grains continued to shoot higher, it triggered spec buying that lifted the spot month about 400 points above last week’s low.
However, the trade was ready to take advantage of this strength and selling pressure started to intensify once values moved above 65 cents.
From a fundamental point of view nothing has changed to justify higher prices, quite to the contrary. The US crop is coming in at a rapid pace thanks to open skies, with 4.0 million bales ginned so far.
At the current pace, around 8.5-9.0 million bales should be classed by First Notice Day on November 21 and with the tenderable percentage at over 70% so far, so expect certified stock to start climbing over the coming weeks.
December at 66.00 cents translates into a price of around 74-75 cents landed Far East for 41-4-34s and around 350 points more for 31-3-35s.
Considering that a taker would not be able to get certified stock shipped before late December or early January, the futures market looks rather pricey at this level, especially in the absence of any carrying charges.
So, it cannot be imagined that merchants would line up to stop December at current prices.
The upcoming notice period for the December contract ends the long five-month stretch that allows speculators to dominate the action without having to reconcile their positions with the physical market.
However, in a little over three weeks, the futures and cash markets will once again converge. With pipeline stocks now filling up rapidly all over the globe current cash prices for US and competing growth suggest that spot futures should trade at no more than 62 cents.
