NY cotton March futures confined to extremely narrow range

Speculators are often decried as the villains that cause erratic moves in commodity markets, but critics tend to forget that they also provide much needed liquidity and momentum. Speculators exist in a symbiotic relationship with the trade and when they are gone, we often end up with lackluster markets like the one we are currently dealing with.

Cotton is not the only commodity that has been abandoned, as hedge funds and other large speculators have greatly reduced their exposures in commodities across the board, with open interest in many instances amounting to less than half of what it used to be a year or two ago.

With supplies rising as a result of bountiful crops or increased mining output and demand slowing due to economic woes, trading opportunities have become harder to find, which is why a lot of these hedge funds have decided to employ their capital elsewhere, notably in the stock market.

The latest CFTC report showed a further reduction in overall open interest of 1’102 contracts, as all participants reduced their respective long and short exposure with the exception of outright spec longs, which increased their holdings by 2’661 lots. This is a welcome change after many weeks of liquidation and offers a glimmer of hope that the tide may finally be turning.

From a fundamental point of view there were also a few positive developments this week, as the certified stock dropped to just 96’521 bales this morning, after around 150’000 bales were taken down this week. Given the strong cash basis that is currently being paid, it is unlikely that the certified stock will grow again anytime soon. For that to happen the futures market needs to move to a more attractive price level!

The strong pace of US exports is another reason why prices may have to move to higher grounds, because the current level of sales is simply unsustainable! Over the last eight weeks US exports averaged around 300’000 bales a week and total commitments have now reached 6.9 million statistical bales.

If we add the 3.6 million bales that go to domestic mills, we arrive at 10.5 million statistical bales in total sales. With just about three million bales to go before the entire crop is committed, the US needs to start rationing its supply by pricing itself out of the market!