NY futures continued to push higher, with December advancing 180 points to close at 66.67 cents and December'08 gaining 107 points to close at 74.57 cents.
It was more of the same this week, as speculators continued to buy the cotton market based on its strong technical performance, runaway grain prices and a weak US dollar. The grain markets are probably the strongest factor in this mix, as they are displaying never before seen strength in forward pricing, with December'08 wheat now at 6.78 dollars a bushel and November'08 soybeans closing today at 9.74 dollars a bushel. Even corn has made another charge as of late, with its forward December contract currently paying 4.24 dollars a bushel.
While it is not unusual to get these kinds of price spikes in cash or nearby contracts, it is unprecedented to see forward grain prices at such elevated levels this early in the game. Just to put this into perspective, the forward wheat contract is 44% higher than a year ago, while November'08 soybeans are 61% above last year's level and December'08 corn is currently 43% higher.
Cotton on the other hand is struggling to keep pace with its acreage competitors, as the forward December contract at 74.57 cents is up by just 25% compared to last year. We further need to remember that last year's grain prices were already substantially above their 20-year average, while cotton prices were depressed in terms of their long-term average. In other words, instead of narrowing an already sizeable price gap to grains, cotton has lost even further ground this season.
This cotton-to-grain ratio, which is at its lowest level in decades, has not gone unnoticed by hedge and macro funds who are placing large amounts of inter-crop spreads - going long cotton and shorting grains - in the belief that this price gap will close over time.
As a result we have seen a lot of new spec buying recently, which has boosted the open interest over the last four weeks by around 30,000 contracts to currently 228,996 contracts, whereof 145,229 contracts are in December.
Meanwhile, the trade remains convinced that this rally is not sustainable due to the sluggish cash market and continues to sell into it, which has become a quite costly, since for every cent the market advances, the trade will have to send around 80 million dollars in margin money.
According to the latest CFTC report, which is already a bit dated since it reflects positions as of September 18, the trade was 15.9 mio bales futures and options short or around 2.0 mio bales more than the week before. This matches the previous record of July 10, which was just about a week before the market started to sell off.
Large and small specs on the other hand owned a net long position of 6.4 mio bales, which is close to the record 6.5 mio bales the spec sector had on July 17. The remaining net long position of 9.4 mio bales belongs to the less volatile index fund component.
As expected, US export sales have been lagging behind in recent weeks, with today's report telling us that only 140,300 running bales were contracted last week, which puts total commitments for the season still at a respectable 5.5 mio statistical bales.
