We estimate that by the end of December most of the stocks in the US will be liquidated, since export commitments currently amount to 2.5 mio statistical bales, of which probably 1.5 mio bales are for November/December shipment, while domestic mills will use around 0.7 mio bales over the next six weeks.
Once two US quotes are in the index, any sell-off or rally in NY futures will pull the A-index along at a fairly high correlation. This will make it quite difficult to force the AWP/futures spread wide enough to get cotton into the marketplace.
December shorts still have time and a very ample spread to March to get out of their position, however if we are correct in our assumption and there are longs ready to take delivery, shorts that overstay their welcome may have to pay their way out of trouble.
At the current price of 47.88 for December, there is no way that a short could profitably ship cotton to the board. Even old crop cotton at zero equity would find it difficult to make the calculation work.
Speculators, who have been increasing their net short position to over 25'000 contracts as of last Friday and who continued to be net sellers this week could push the market even lower in the days ahead.
While we see the downside as limited, we also don't see any great upside potential given the fact that practically a whole US crop is waiting to be hedged 2 or 3 cents above current values.
We therefore anticipatea continuation of this narrow trading range over the next two or three months, with March expected to remain between 50 and 54 cents.
marketing@alchempro.com
