NY futures moved higher this week, with December advancing 179 points to close at 64.58 cents.
The market continued to move sideways with a slight upward bias as renewed weather concerns have tipped the scales temporarily in favor of the bulls. However, trading was again lackluster this week, as the daily volume stayed below 16'000 contracts all week long, with today's volume estimated at just 4'000 contracts. On the other hand, open interest increased by about 5'000 contracts this week, which may be seen as a constructive sign by the bulls.
We are still in a weather market and recent news about detrimental rains in South Texas and a rather erratic weather pattern in China this summer have led to a firming of the 'weather premium'.
In China, many of the main provinces such as Henan, Hebei, Shandong, Jiangsu and Anhui have been hit by unusually strong storms since early July, with hail and flooding possibly affecting the standing crop. A drier weather pattern in August is needed to avoid yield losses from boll shedding, wilting and insect pressure that typically accompany these excessive rains.
Speculators, who have been the driving force behind the market's run-up since May have recently been conspicuously absent as the latest NYBOT spec/hedge report showed. Last week spec longs reduced their position by 5'794 contracts to 11.2 mio bales, while spec shorts bought back 3'776 contracts to cut their position to 4.6 mio bales. These changes resulted in a slightly smaller spec net long position of 65'450 contracts, which corresponds to 31% of open interest.
Meanwhile, the trade added just 819 contracts on the long side and now owns 9.9 mio bales, most of which belong to index funds. Trade shorts bought back 1'199 contracts, which reduced their still very substantial outright short position to 16.5 mio bales.
The CFTC report, which is more complete because it also takes options into account, confirms that specs have cut their involvement in the cotton market over the last couple of weeks.
Interestingly, if we compare the latest CFTC report of July 24 to the one of May 15, when the market traded at contract lows, we notice that spec shorts (as listed in the 'non-commercial' and 'non-reportable' categories) currently own just about 2.3 mio bales in outright shorts, down from 8.5 mio bales in May. Spec longs on the other hand now hold 8.7 mio bales, up from 7.3 mio bales in May.
Outright trade longs have more or less maintained their position over the last 10 weeks, as they currently own 7.0 mio bales, up just 0.2 mio bales since May. The biggest change among all categories happened in trade shorts, which increased their outright short position in futures and options to 22.5 mio bales, up from 15.3 mio bales on May 15.
