Sharon Johnson: Economic worries vs. cotton consumption
Daily Trading Activity – US cotton futures ignored Wed’s key reversal with a rally to new multi-week highs only to close down on the day in the December contract where the vast majority of open interest is housed. Futures rose through the first 11 hours of the day’s session culminating in a slightly higher weekly top after options opened at 10:30 AM EDT. Spec buying (new longs/short covering) into trade selling was the predominant feature but the Dec/Mar spread failed to gain traction on the rally as was the case on Wed resulting in modest narrowing through the remainder of the day.
Continued concerns with slowing economic growth turned US stocks down going into the new lunch hour which also weighed on cotton prices. However, by the close, various stock indexes recovered to some degree as did cotton with the December and March contracts up 60 and 59 pts respectively resulting in their spread difference holding steady at 170 pts over. Estimated futures volume was on the light side with only 11,700 contracts.
Cert stocks eased down another 3K bales to 47,793 bales, the lowest since the fall of 2004 as Mentioned in previous reports. Prior to the July 2010 delivery period, deliverable stocks were over 1 mln bales but accelerated export sales/shipments of US cotton forced commercials to use those deliverable stocks to meet commitments. The drawdown in cert stocks was not a surprise to commercials but did seem to catch funds by surprise at a time when they had just gone net short.
US cotton futures open interest is up 3K contracts this week and up 7K since Tues, Jul 20, the day when futures hit a multi-month low and low close of 72.96 and 73.01 basis December. We can infer from the jump in outstanding contracts that spec funds have reduced their net short exposure with producers/merchants adding to short hedges.