Open interest actually increased this week, as Hedge Funds reportedly bought a sizeable number of new contracts. On Wednesday, open interest jumped by 2'436 lots in March alone, with the total increasing by nearly 4'000 lots. As of this morning there were a total of 202'326 contracts open, of which 149'764 contracts are in March, May and July. In contrast, the certified stock measures a paltry 1'510 contracts (=151'000 bales) at the moment, which includes bales 'under review'.

When we look at the market from the perspective of long and short futures, we believe that the longs have a much stronger hand at the moment. These longs, which belong mainly to Index and Hedge Funds, benefit from an inverted market that allows them to roll their position forward to a lower price all the way out to December 2012. Given the bullish fundamental and technical picture, they seem to be in no hurry to exit their position anytime soon. Also, with the futures market still not overvalued in relation to the physical market, some trade-related longs may be willing to take delivery of certified stock.

On the other hand the shorts seem to be in a predicament. The trade owns most of the short positions, which are primarily held against unfixed on-call sales by mills (still nearly 8.1 million bales on March, May and July) and against physical longs. Rolling a short position forward is a losing proposition in an inverted market and it is basically prohibitive with the March/December spread at over 47 cents. Since merchants won't allow their outstanding mill fixations to be extended past current crop, all of these current crop fixations will have to be dealt with by latest the middle of June. This adds up to a lot of potential buying pressure over the coming months.

Eoin Treacy's view Despite the fact that some of the more speculatively driven commodity markets have encountered resistance, there is still a strong fundamental argument for the relative strength being exhibited by a number of agricultural commodities.

The world's weather is currently going through a particularly unsettled period which has played havoc with supplies of a number of essential commodities ranging from rubber to cotton and a number of food crops. This situation will not be resolved overnight because it will take time for new supply to grow. However, the potential for regulators to squeeze speculative positions remains an increasing threat.

Cotton is in backwardation across the curve. The spread between the 1st and 2nd month continuation charts is also noteworthy. If peaked near 13.5¢ prior to the December 2010 roll and has since found support near 4¢.The current value just below 6¢ still offers an attractive roll yield and is helping to support prices.

Short squeezes as discussed in the above report are important events but also help prices to quickly reach a point where sellers begin to reappear once more. Therefore as with any other market, if an upward acceleration were to occur, a trailing stop would be appropriate for those fortunate enough to be long and the first clear downward dynamic would probably mark a high of at least near-term significance.

Cotton found support near 140¢ over the last month and has now rallied back up to retest the December peak near 160¢. A sustained move below 140¢ would now be required to indicate the return of medium-term supply dominance.