NY futures moved higher this week, as December advanced 143 points to close at 58.61 cents.
Supported by active mill buying, the cotton market managed to recover some of the steep losses it sustained over the last couple of weeks. For the second consecutive week, US export sales topped 400'000 running bales of Upland and Pima and participation was broad-based, as 22 markets joined in the buying.
From what we can tell, export sales continued at a brisk pace this week and the next report may show an even higher number. For the season, US export commitments already total 4.1 mio statistical bales, which is over 2.7 mio bales more than a year ago. Actual shipments amount to 0.8 mio bales or 0.2 mio bales more than last season.
This increased turnover seems to have a combination of reasons. Mills still need cotton to get to new crop and are taking advantage of this price break, while merchants are mindful of carrying charges and have been willing to make slight concessions in their asking basis in order to move inventory.
Some mills may also buy old crop cotton as an 'insurance policy', since the rains in South Texas and the extreme heat wave in the Mid-South and Southeast have raised some questions regarding the quality of the coming crop.
So why does the market not react in a stronger fashion to this sales activity? We believe that the trade as a whole is approaching the market with utmost caution after the wide swings we have seenover the last three months.
Rather than committing to an outright position, traders prefer to work from a basis long position and maybe apply some options strategies to provide upside potential in case of a breakout. But the trade is currently not a driving force on the long side, although it has been a net buyer of futures against physical business.
When we look at the activity of speculators in recent weeks, there has been a clear move to reduce long positions due to what transpired in the credit markets. Last week alone, spec longs cut their position by 15'283 contracts, while spec shorts were surprisingly inactive as they reduced their short exposure by 900 contracts.
Typically a breakdown in the technical picture like we have seen last week would invite short sellers, but it seems that many traders were either in a state of paralysis or had other priorities
Thanks to the Fed intervention late last week, financial markets have calmed down for the time being and volatility has dropped back from extreme levels. This has given traders a chance to regroup and the selling pressure that has spilled over into commodity markets has subsided. Nevertheless, last week's breakdown has left its marks on the chart and it will take awhile before these specs return as buyers.
In the near term the cotton market will probably continue to drift sideways, albeit with an upward bias. From a technical point of view this is supportive, because it allows the market to build a basefrom which it may eventually move higher.
