Cotton market sees a steep drop with NY futures sharp fall

25 Jan '08

3 min read

By adding more obligations to an already massive mountain of debt, the only way to take care of this debt is to monetize it (= printing money). Thanks to debt monetization, fiscal authorities are absolved of their responsibility as debt disappears, at least in relative terms, and inflation takes its place.

There is little doubt in our mind that these emergency measures will result in an acceleration of inflation down the road and further debase an already weak US currency. Therefore, it is important to take these angles into consideration when discussing the price of cotton.

For example, if the price of cotton were quoted in ounces of gold instead of US dollars, it would make sense for prices to drop because of lower consumer spending. But the way things are going, it is quite likely that anything quoted in US dollars will see its nominal value rise as the result of much higher inflation and a weaker currency.

After open interest reached yet another record of 281'816 contracts as of last Friday, we saw the first sizeable liquidation of positions during Wednesday's sell-off, when open interest dropped by 10'152 contracts. Since the beginning of December, spec longs and trade shorts had added around 6 mio bales to their respective positions, before finally closing out some of these holdings in yesterday's limit down session.

As in previous periods of financial turmoil, it was rumored that hedge funds were liquidating some of their long commodity positions in order to raise cash for margin calls. For the trade on the other hand this drop in prices couldn't have come at a better time, as cash flow on its record 21.3 mio bales net futures and options position (as per CFTC) was getting rather tight.

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