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NY cotton March futures sink 132 points

31 Aug '13
5 min read

It will be interesting to see how this is going to affect cotton prices. Importers like Turkey or Indonesia, who sell a sizeable amount of their finished goods locally, are likely going to feel the pinch. India on the other hand should be in better shape, since it is a large exporter of raw cotton as well as yarn (mostly to China). From a US perspective the fear is that the export market will get flooded with cheap Indian offers, which could make life difficult for US exporters.

So where do we go from here? Speculators will probably continue to reduce their net long position on rebounds. The trade is still considerably net short and we therefore don’t expect it to add a lot more to its position before the outcome of the US and other Northern Hemisphere crops is known.

Fixations and sales of basis-long positions should provide enough liquidity for specs to sell into for now. However, we need to watch outside markets, because any negative news could spook specs into dumping their longs in a greater hurry. From a technical perspective the 81.72 low of June 3 is quite important, because it represents a 7-month low. A break below that level would likely lead to a new wave of spec selling!

In the longer term we still believe that China holds the key to prices. As long as China absorbs the expected 9.5 million bales production surplus from the rest of the world, stocks outside China are going to remain relatively tight. Also, while the hot money crowd may have turned its back to emerging markets for now, this doesn’t mean there won’t be another wave chasing ‘bargains’ in the not too distant future.

There is an exorbitant amount of cash sitting on the sidelines, with few assets to chase after, now that global bond markets have started to reverse down. Chances are that we could see a melt-up in the remaining asset classes over the next year or two, such as US and European equities, as well as real estate and commodities.

Plexus Cotton Limited

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