This will have some important implications for the A-index and hence the AWP, because Syria will be replaced by California/Arizona, which is currently quoted at 175 points higher. This will automatically lift the A-index by another 35 points, which at today's values would translate into an AWP of 43.10 cents.
With March futures at just 900 points above that level, it will be nearly impossible to get cotton out of the loan, which forces mills to pursue the remaining foreign growths of the A-index: Indian, West African and CIS.
The longer this condition exists, the better supported the price of these growths becomes. In order to get US cotton into the marketplace, the AWP vs. Futures spread needs to widen, but as we pointed out last week, this is getting increasingly difficult because of the high correlation between the two US quotes and the A-index.
The third reason for a more optimistic outlook on prices is the large speculative net short position, which as of last Friday amounted to 28'492 contracts or 17.4 percent of open interest.
Summing up, we believe that there is very limited downside for cotton prices. However, as we have seen on Wednesday, the upside seems to be equally contained, which comes from the fact that there are some 17-18 million bales of loan eligible cotton waiting for an opportunity to get hedged at the right spread between the AWP and March futures.
This has created a wall of hedge selling, which is hard to overcome, even for a sizeable amount of spec short-covering. We therefore expect prices to remain boxed in between 51 and 54 cents in the foreseeable future.
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