The same cannot be said of short speculators, who were 9.8 million bales short last week and are to a large degree made up of momentum players. These shorts are trend-followers and are quick to react to a change in the technical picture.
The trade, which is comprised of growers, merchants and mills, probably has a combined futures and options short position of around 5.0 mio bales at this point.
Again, in this calculation we have backed out the 'hedge' longs that are related to index funds. Most of these short futures by the trade are hedges against physical long positions, both in US and Non-US cotton.
In addition to this basis-long position, the trade has the potential to literally pull millions of bales out of the loan and sell futures against them, thereby increasing the basis-long position even further.
Therefore, the wider this spread between the AWP and March moves out over the next few days, the more inviting it will be for the trade to arbitrage this spread.
The beauty of the current loan redemption system is that it freezes the AWP for an entire week and allows traders to lock in a workable spread.
As long as China stays out of the international market, there is not much hope that prices paid by mills will increase and we therefore see limited upside potential in the market over the next two or three months. We believe that the most likely scenario is a sideways market with a range of 48.00 - 53.00 cents basis December.
marketing@alchempro.com
