NY futures extended their impressive rally this week, as March advanced 340 points to officially close at 82.65 cents, although its ‘synthetic’ value was slightly higher at 82.91 cents.
Last week we talked about the possibility of an explosive move to the upside and it didn’t take long for the market to go into full-blown panic mode, as it rallied nearly 500 points over the last two sessions.
Today’s volume was massive with an estimated 64k futures and 28k options changing hands. Overall open interest continued to move higher this week and reached 28.81 million bales as of this morning, although March open interest declined from 17.35 to 16.72 million bales on short-covering.
As Yogi Berra used to say - “It’s déjà vu all over again”! At least that’s how it feels like, since we seem to follow in last year’s footsteps, when a short-covering rally led the market from 68 cents in mid-November all the way up to a high of 87.18 cents by mid-May, only to crash back down to 71 cents a month later.
Although we started again at 68 cents in mid-November, the rally has been much faster and steeper this season so far. The driving forces remain the same, with spec buying initiating the move and then panic trade short-covering taking over during the melt-up phase. But there are also a few differences to last season, like the much higher unfixed on-call position and the stronger pace of US export sales, which have both added fuel to this rally.
We were hoping to see a bigger drop in the amount of unfixed on-call sales this afternoon, but the CFTC report showed still 4.66 million bales open on March as of last Friday. For May and July the numbers were 3.34 million and 3.55 million bales, respectively, which means that there were still 11.55 million bales of current crop sales to be fixed. That’s only a 0.04-million bale improvement over last week!
Meanwhile the overall unfixed on-call position rose to yet another historical high of 15.64 million bales, which is 0.21 million bales more than in the previous week. As long as there is such a massive amount of on-call sales to be fixed, we see it difficult for the market to come under much pressure!
The strong US export sales report of this morning certainly helped to scare the shorts, as last week another 374,100 running bales of Upland and Pima were sold for both marketing years. 15 markets participated in the action and it is quite interesting that India, who is the second largest exporter after the US, was the best buyer for the third week in a row. Shipments of 290,100 running bales were decent, but exports are still running behind last season.
Total commitments for the season have now reached 11.9 million statistical bales, or 2.6 million bales more than a year ago, while shipments of 3.8 million statistical bales are 0.5 million bales behind last year’s pace.
As stated last week, most of these new sales consisted of discounted qualities, such as low mike Texas cotton, which have been quite attractive from a fixed price point of view, until now at least! With the futures market at 83 cents, we feel that it will choke off sales of even such discounted cotton and we therefore expect US export sales to slow down considerably unless the market backs off again.
So where do we go from here? The short squeeze is on and it is difficult to predict how far it will run. The problem is that open interest is still near a record and so are unfixed on-call sales. This means that there is plenty of ‘energy’ in this market, which can lead to some wild and overextended moves.
However, the market is going up because of a shortage of sellers, not a shortage of cotton! The futures market is fast becoming the highest bidder for US cotton and there will eventually be a lot of cotton thrown at it. With only 3.8 million statistical bales shipped so far, there is still a lot of cotton that could potentially get freed up through cancellations, or worse, defaults. And with 72% of the bales classed being tenderable, merchants should have plenty of ammunition with which to fight speculators.
Furthermore, the high price level and the massive inversion to new crop will entice mills to play the ‘stretching game’, by using as little current crop cotton as possible and instead waiting for new crop that’s 10% cheaper. In other words, we expect these high prices to lead to rationing over the coming months.
It may take some time for these dynamics to unfold, but once they do it will bring sellers back into the game and the market will probably continue to follow the script of last season!
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