The cotton market continues its remarkable gyrations. Starting in mid-August, cotton futures declined substantially. The first Monday in November saw cotton futures little changed.

Then the market took off like a rocket. The explanation for this bounce is short covering. Hedge fund speculators had built an outright short position, the largest such position since April 2020.The early November price rally was driven by short speculators rushing to buy back their positions. The combination of bullish Chinese economic news, i.e. relaxing Covid restrictions, technical buy signals, and limit up market reactions (with even higher prices reflected in the options market) induced speculative shorts to buy back their positions. Any remaining discrepancy between undervalued cotton futures relative to cash cotton prices should be eliminated, and the result is that remaining speculative shorts may get squeezed as they try to exit their position.

It remains to be seen where the new equilibrium price level will be when the short covering and squeeze dynamics are passed. Back in April 2020, the hedge fund net short position came and went in about eight weeks, but the resulting price rally continued, fed by fundamental forces like pandemic recovery and supply concerns. The current demand situation appears uncertain. The 2022/2023 supply picture could get tighter, but it remains to be seen.