According to the latest CFTC spec/hedge report, which includes both futures and options, the trade was a record 14.9 mio bales net short as of July 3.
We estimate that the trade had to send roughly a billion dollars in margin calls to New York over the last two months, on top of the almost two billion dollars it spent in redeeming cotton from the loan back in May.
We can therefore imagine that additional credit is not that easy to come by for a lot of CFO's at the moment, which precludes the trade from engaging in a fight against hedge funds who may want to commit some of their vast resources to the long side.
Nevertheless, when we look at the futures market from a pure 'cash value' point of view, New York is now by far the best buyer out there. When we add in the premium for higher grades, the December contract currently 'pays' around 70.25 cents for 31-3-35's, FOT Memphis/Galveston, November delivery.
This is a much better price than that which mills are prepared to pay at the moment. What the market will have to figure out is whether New York is simply too high or whether mills will ultimately have to pay even steeper prices for their cotton.
marketing@alchempro.com
