With the exception of Friday, which brought us a flurry of end-of-quarter activity, trading volume was again very light at somewhere between 6'000 - 8'000 contracts a day. Despite flirting with new contract lows every day of the week, the market never broke below the 52.95 cents low of June 26.
From a technical point of view the recent market action can either be seen as a pause in a prevailing downtrend that will ultimately resume or it may hint at a bottom in the making. More evidence is needed to confirm either scenario, although the fact that volume has been rather slow is telling us that the downtrend has lost its momentum and that the market may get ready for a bounce.
From a fundamental point the market is equally ambiguous. A mill will contend that the futures market looks expensive, while sellers are finding it too cheap. Let's take a closer look at the current price structure for US new crop:
In order to offer MOT 31-3-35 landed Far East, a seller typically starts his export price calculation with the AWP, which is currently at 43.11 cents. To this, he adds 5.00 cents for the grower equity, 4.65 cents loan premium for Middling 1.3/32 and about 11.00 cents in charges to CIF Far East. This results in a price just shy of 64.00 cents landed Far East, which no mill is willing to pay at this point in time.
If a seller can't find a home for his cotton in the export market, he may look at the NY futures market as a potential buyer. We saw this happening over the last five months, when the certificated stock swelled by over 500'000 bales because it offered the best price in the marketplace. However, in order for deliveries to the board to make sense it takes about a 12.00 cents spread between the AWP and NY December (based on a grower equity of about 5.00 cents), which is about 2.00 cents shy of where this spread closed today.
marketing@alchempro.com
