'Christmas mood' - small gains in NY cotton market

24 Dec '11

5 min read

While Mrs. Merkel and the Bundesbank don't want the ECB to monetize sovereign debt, Mr. Draghi seems to circumvent this German block by lending money to the banks in order for them to buy Italian and Spanish debt. Whether that plan will work remains to be seen. After interest rates in Spain and Italy had dropped on Wednesday, they have since started to climb again.

This ECB move could prove to be significant for commodity markets because it signals to traders and hedge fund managers that the money printing game is still alive and well. This in turn could flip the investment switch to "risk on" and money may therefore flow back into the markets. Probably not during the holiday period, but we wouldn't be surprised to see a lot of activity right after the turn of the year.

Among all the negativity in regards to global cotton consumption, which according to the USDA is now a full 10% below its peak of five years ago, we keep noticing these very strong yarn production numbers in China month after month. At the current pace Chinese mills will produce around 29.0 million tons of yarn in calendar year 2011.

That's 11.8 million tons or 68 percent more than in 2006/07. Yet Chinese mills are supposed to consume 6 million bales less cotton than they did five years ago. Did this entire increase in yarn output indeed come from man-made fibers as these statistics suggest, while cotton went the other way? Did cotton's share in the spinning system really decline from around 63% in 2006/07 to just about 35% today? Or could China's mill use hold a positive surprise going forward? A lot of questions, to which there are no definitive answers at this point.

So where do we go from here? Although we are still in a long-term bearish trend and there is plenty of cheap cotton looking for a home at the moment, we are mindful of the old adage 'never short a dull market'. While this downtrend may still have some life left, we need to keep a watchful eye on potential game changers, such as declining plantings next spring, a potential rebound in demand, continuous Chinese Reserve buying that translates into substantial import quotas and Fed/ECB money printing.

One thing seems for sure - with all that's happening on the political and macroeconomic front, it promises to be another lively and volatile year!

Plexus Cotton Limited

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