Market moves in right direction

12 Jan '08

4 min read

From a fundamental point of view it became quite evident that the market had gotten ahead of itself, as buyers were not chasing these elevated values and export sales dropped to a trickle. US offering prices were probably at least 3-4 cents above mills' price ideas.

Tomorrow the USDA will issue its latest supply/demand figures, which are expected to be bearish because world demand is likely to be scaled back further and US exports may also get lowered again.

However, as we have pointed out before, the market has already 'discounted' a much lower world consumption figure than the 128.3 mio bales which the USDA carried in its last report. We feel that consumption is probably not much more than 120 mio bales at this point, which may appear bearish, but let's not forget that this would still be above world production of currently 118.76 mio bales.

Nevertheless, a negative headline number is likely to further feed the downward momentum of this correction.

So where do we go from here? After boosting its short position by an additional 4.5 mio bales since early December, the trade is finally seeing the market moving in the right direction. However, we feel that traders are slowly but surely waking up to the increasing power these long-only index funds have in the commodity arena and that this sell-off may be seen as an opportunity to get out of short positions or to fix some of the 6.7 mio bales in unfixed on-call sales. We therefore expect good scale down support to emerge from current levels on down. Chart traders may try to scalp the market from the short side for a few cents now that the trend line has been broken and some of the weaker spec longs may exit positions, but the core long position in our market belongs to index and hedge funds that are investing in commodities for the long run.

Inflation protection is one of the main reasons for these investors to be in commodities and the more the Federal Reserve juices the money supply by lowering rates, the more attractive commodities look as an alternative investment vehicle.

We believe that we are just at the beginning of a significant asset allocation shift into commodities and that the money that is pouring in as long-only investments will continue to boost open interest to unprecedented levels and in the process inflate commodity prices further.

Plexus Cotton Limited

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