Related Keywords: Agriculture
By Leslie Josephs
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones) -- A widening spread in the cotton market is sowing fears that a squeeze is in the works.
The premium for cotton deliverable in May compared with the second-month position widened to a five-month high this week. Analysts say it could be a sign that there isn't that much cotton deliverable to the exchange.
To support their theory, the analysts point to U.S. Department of Agriculture data that showed the U.S. already has either shipped or is planning to ship 11.47 million bales, 70,000 more bales than the USDA's estimate for the entire season, which ends July 31.
As a result, cotton merchants may choose to hold on to some of their supplies in that case and not deliver to the exchange.
"There's not a lot of cotton to get you ... to mid-October," said Penson Futures senior cotton analyst Sharon Johnson. "I do think merchants want to hold on to their cotton. [They] don't want to run the risk."
On Thursday, the premium for May cotton over fiber deliverable against the July contract rose to 3.2 cents, the highest point since Nov. 14. In midday trade Friday, the spread had narrowed to 2.8 cents. May-delivery cotton was trading 1.1% lower on the day at 92.02c a pound.
"There are probably a lot of merchants out there who have undeliverable bales," said Chris Kramedjian, a risk management consultant at brokerage INTL FCStone, referring to cotton grown at other origins. "It really is trading as if there's a squeeze."
Only U.S.-grown cotton is deliverable to ICE Futures U.S. against the contract. But dry weather hurt U.S. production this season, which was the country's smallest harvest in three years.
Adding pressure to the market is the approach of first-notice day, the first day position-holders who are short the market report whether they will accept delivery of physical cotton, on April 24.
If they choose not to deliver, market participants will have to pay to cover their short positions, which could send prices higher.
-By Leslie Josephs, Dow Jones Newswires; 212-416-4055; leslie.josephs@dowjones.com
(END) Dow Jones Newswires
April 13, 2012 13:09 ET (17:09 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.
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