Certified Stocks

Discussion
The current allocation of certified stocks, and a lot more cotton futures information, can be found on the ICE futures website under “Featured Reports”.  Certified stocks represent mostly merchant inventory that is in position to be delivered against short futures positions, i.e., delivered by those holding short futures contract. The level of certificated stocks in delivery point warehouses is reported daily by the ICE.  As the chart above shows, certificated stocks can fluctuate a lot.  Those fluctuations can have various meanings.  A declining certified stocks level can be an indicator of increasing commercial demand. Conversely, when certificated stocks are rising, it may reflect a lack of demand for U.S. cotton in the export market.

A high level of certificated stocks (e.g., over several hundred thousand bales) represents a greater credible threat of physical delivery of cotton against long futures positions held past First Notice Day.  Therefore a potential side effect of low certified stocks is that it might have encourage speculative funds to take larger long positions with less chance of a getting caught in a long squeeze situation and/or getting stuck taking delivery of physical cotton. With low potentially deliverable supplies, the fund sector may feel like it has more room to push the futures market higher (and further from the cash market) provided it has enough time to eventually exit that long position.

The drop-dead date for funds holding long positions is First Notice Day (the 5th business day before the end of the previous month before contract expiration).  Those dates are indicated on the chart above as red dots on the blue line.  That is the day when sellers of futures contracts notify the exchange of intended deliveries of physical cotton against their short futures positions.  Generally, the people in that position are big cotton merchants, who are also the people who certify most cotton.

After a series of minor fluctuations at very low levels during the Fall of 2017, the certified stock level shot up dramatically, reaching 27,995 by November 2 and 46,922 by November 9.  The level has since appeared to stabilize around 47,628 bales since December 7, most of which were in Galveston (46%), Memphis (39%), and Houston (15%).  The lack of certifications could reflect both strong commercial demand for quality cotton, as well as a growing supply of non-tenderable, low quality cotton.

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