While the trade remains on the defensive, trying to make sense of the supply/demand situation, speculators seem to have no doubt as to where this market is headed, guided by a chart that paints a rather bearish picture at the moment.
It is therefore not surprising that speculators have kept up their selling pressure this week, especially after the market broke through contract lows.
As of last Friday, speculators were 1.1 mio bales net short (6.1 percent of open interest), with outright spec shorts now amounting to over 9.0 mio bales, up over 2.5 mio bales over the last couple of months.
Again, it is important to realize that the market has not been driven down by long liquidation, but rather by spec shorts upping the ante.
Open interest continues to break record after record and reached 184'683 contracts on Wednesday, which compares to just 110'000 contracts at the same time last year.
As crazy as it may sound, the lower the futures market moves in relation to the A-index, the less competitive US cotton becomes, which in turn supports the price of foreign growths.
This is due to the fact that US cash prices are calculated from the AWP, which is simply the A-index less transportation and quality differentials.
With the Step-2 export subsidy gone, there are really just two ways to get cheaper physical prices in the US - a lower A-index and/or lower grower equities ('equity' is the price at which a grower sells the right to his loan eligible cotton).
marketing@alchempro.com
