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Cotton margins, open interest & who's buying

ICE is raising cotton margins for all contracts to 8400. for specs and 6,000. for hedgers, increases of 1400.00 and 1000.00 respectively. As a reminder, the exchange raised margins on Feb 11 due to the expanded limits put in place on Feb 7. In various emails prior to the expanded limits going into place, I indicated margins would ultimately be increased by at least 50% since a normal daily price range would grow from the previous 4 cents or 2,000.00 to 7 cents or 3,500.00. The additional risk (of that magnitude) would necessitate margins being increased from 4K to 6K for hedgers and from 4600.00 to 8400.00 for specs.

US cotton futures closed limit up today and per option values in the May and Jul contracts, they closed 557 pts in the former and 484 pts in the latter above their underlying futures closes. Futures volume was 30,556 despite being limit up as spreads could and did trade. Cert stocks rose to 172,965 with another 25,959 under review for a possible total of 198,924 bales. Chinese values were up modestly last night compared to the rally in the US on Tues.

Despite comments to the contrary, today’s rally is not driven exclusively by mills attempting to price in the March contract prior to the close of business Fri, Feb 18 in front of FND Tues, Feb 22. I suspect many of those traders indicating with various media outlets that mill fixations are responsible for today’s limit move are merely parroting other traders. Quite frankly, any broker/merchant who does significant volume with mills are not talking and those that are talking are not the ones doing the volume.

It does appear as though someone is trapped in the March as open interest as of this morning was 21,994 but since 12-16K of today’s volume was spreading, open interest should be down to 15-17K tomorrow morning. A drop of the same amount, around 6K, on Thurs and again on Friday will pull open interest down to 4K or so going into FND. Given the exchange’s willingness to enforce an old rule requiring specs or hedgers to provide documentation to substantiate their claim for entering notice period with more than 300 contracts, open interest by next Tues, could be even smaller. As indicated in the ICE spec/hedge report as of last Fri, specs covered over 14K shorts last week whereas the trade closed out more than 10K net longs, it could be one or more spec funds that are trapped as well as a small mill position. As a reminder, some merchants require mills to price a week in front of FND reducing the size of any mills left with any pricing.

Exports should be similar in size and tone from a week ago with better export sales in new crop but sizeable export shipments. I find it somewhat amusing traders use the better shipments to warrant higher price movement. Cotton being shipped now was bought last fall at much lower prices so of course they are going to take delivery. Traders are doing what is called “double-dipping”, pushing prices higher with strong export sales last fall and again with strong shipments. What, were they thinking it would be sold but not shipped?

The CPI will also be out Thurs morning but commodities did not give a lot of attention to today’s PPI. Abercrombie released its earnings today and made mention of the problems they are facing with high cotton prices, time permitting, I urge everyone to read their release.

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