After running up by nearly 50 cents and then giving it all back in a matter of just over a month, it has become quite difficult to gauge what cotton is really worth today. Basis levels are all over the place and at premiums we have never experienced before. This week US MOT high grades still sold at 28 cents above NY futures for nearby shipment, which is almost 20 cents more than the traditional basis. It is astonishing that mills continue to pay this kind of premium when they could buy more or less the same quality 13-14 cents cheaper in New York. Then there is the ongoing steep inversion between March, May and July, which has not narrowed at all during this selloff and is contradicting this bearish move.

The December notice period serves as an opportunity to figure out what cotton is worth these days. Although it may initially have been viewed as a negative sign that a major Memphis merchant decided to tender 49'300 bales, this isn't necessarily true. Unlike in previous years it makes a lot of sense to put cotton on the board and then take it back in March, May or July at a huge discount. And this season the risk of getting inferior bales back is basically non-existent, because nearly all of the certified stock consists of current crop. At the same time it makes sense from a taker's point of view as well, since certified cotton is, as we have pointed out above, the cheapest cash cotton available right now. Based on where the December has been trading over the past few days and considering what mills are still willing to pay for physical cotton at the moment, it seems that 115-120 cents represents about 'fair value'.

So where do we go from here? The short-term trend is still pointing lower, although Wednesday's session offered hope that some sort of a bottom is within reach. Physical prices still hold the key to this market in our opinion. If they continue to hold up as well as they have been this week, then the futures market will sooner or later have to turn back up. One positive in this regard is that the US crop is over 85% committed at the grower and merchant level, which means that there is relatively little pressure to get the balance sold. This would be different if the crop was only 40% or 50% committed, because merchants would be much more aggressive to push sales than they are now.

Eoin Treacy's view Cotton is one of a number of commodities whose price has soared this year. >From a medium-term perspective, now that prices have entered a corrective phase, it will be interesting to see to what extent elevated levels are sustained. Cotton above or in the region of 100¢ remains an historically high level and, if sustained, is a further indication of mounting inflationary pressures.