NY futures turned back up this week, with December rallying 231 points to close at 63.65 cents.
Strong outside markets continued to be a supporting factor for cotton this week. The US dollar index dropped to a 14-month low, while spot gold rallied to yet another all-time high of over 1'060 dollars an ounce today. The US dollar continues to get hammered as foreigners are trying to diversify away from the greenback.
US export sales of 136'300 running bales net (92'300 RB of
As of last week there were only 211'781 bales of new crop classed and just 44% of these bales were of tenderable qualities. With persistent cool and wet weather preventing harvest from gaining momentum, it is likely that the
With mills turning their attention towards foreign growths, the A-index and hence the AWP should remain well supported for now and that may offset any harvest pressure that typically occurs at this point in the cycle. As we have previously mentioned, the world outside the
When we look at the current composition of the A-index, which calculated 64.55 cents before today's rise, we still have
If the A-index were to go up, it would force US prices higher as well, at least for the next 4 or 5 cents. Once the AWP (47.34 cents next week) rises above the loan of 52.00 cents, US cotton can be redeemed either at the loan plus carryings or at the AWP, whichever is cheaper. Therefore, if foreign prices move substantially higher, let's say five to ten cents from current levels, then the feedback loop that currently exist between foreign and US prices would stop. Once the AWP is significantly higher than the 52.00 cents loan, it is no longer relevant to US pricing, especially this early in the season when loan cotton has not yet accumulated a lot of storage and interest. This would also make it difficult for the futures market to run away to the upside, because it would no longer have to keep pace with a rising AWP, but instead it would have the 52.00 cents loan level as its reference point. Therefore, once the futures market approaches 70 cents, it offers an attractive spread for loan redemptions.
Of course the above described scenario only works if there are no more setbacks to the
So where do we go from here? Strong outside markets and the weather remain the main drivers at the moment. The weather remains a major worry as two cold fronts are dipping down towards the cotton belt, although at this point no season-ending frost is forecast. The Mid-South crop is a disaster this year, but fortunately it "only" encompasses 3.2 million bales, while the remaining 10 million bales may still produce a decent crop. However, there is no more room for error since the crops are late and time is running out. The market will therefore be on edge for the next 3 or 4 weeks and any turn for the worse could send values skyrocketing. Furthermore some powerful speculators have cotton on their radar screen and they will not hesitate to commit to long positions if the chart gives them a reason to. Depending on what indicators these chart traders are following, the trigger points are somewhere between 64.04 and 65.47 cents. The market is well supported and there is probably a better than 50/50 chance that the market will take out the triple top and rally towards 70 cents in the near future. It may therefore not be a bad idea for anybody with short futures to exchange them for some in the money puts or put spreads!
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