Certified Stocks

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 contract positions. The level of certificated stocks in delivery point warehouses is reported daily by the ICE. 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.  As the chart above shows, certificated stocks plummeted this summer from 600,000 bales to almost zero during the summer.  Had it stayed there, it might have encourage speculative funds to take larger long positions with less of a getting caught in a short squeeze. That is, the fund sector may feel like it has more room to push the futures market higher (and further from the cash market).  Since the fall of 2016 the certificated stock has been rising. For the week ending June 29, the certified stock appeared to peak above 490,000 contracts and reversed in a notably large decertification (over 100,000 and 60,000 bales on June 26-27).  The following week ending July 6 saw a further 203,859 bale reduction.  The decertifications have continued, although not as massively, with the level of certified stocks down to 66,825 by July 13 and below 10,000 by August 31.  On September 21 the level was 2,380, but it rose slightly to 3,020 (September 28), then 5,444 (October 5), then 6,674 (October 12).  The longer term downtrend in certified bales suggests that there is enough commercial demand from either domestic mills or the export market that previously certified cotton was needed to satisfy.  That is, the large decertifications were a fundamentally bullish indicator.

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