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Cotton futures fall precipitously this week
May '08
NY futures fell precipitously this week, as July dropped 400 points to close at 65.99 cents, while December slipped 420 points to close at 74.64 cents.

It was a bit of a surprise to see how quickly and easily the market fell through the bottom of its four-week range before coming to a halt near the technically important 66 cents level. We would have thought that scale down trade buying and the 11'400 contracts of unfixed on-call sales in July would provide better support, but there obviously wasn't much there.

It seems that liquidity concerns have something to do with the market's renewed weakness, as we head into the summer with the highest amount of US ending stocks ever at around 10 mio bales. With a trade that has been beaten up during the March debacle, there are fears that some companies may have trouble financing the large amount of loan cotton that will have to be redeemed over the next 2 to 5 months.

We see some efforts by merchants to push sales in order to reduce their inventory, but that's not easy at a time when mills are perfectly happy to adhere to their hand-to-mouth buying pattern that has served them so well over the last four seasons.

The certificated stock of currently about 1.6 mio bales is part of this large inventory and when we look at the current spread of over 860 points between July and December, it becomes clear that not too many players in the trade seem to be in a position to carry this certificated stock despite the 3 cents profit it offers to a potential financier. If there was plenty of cash available, such a wide difference would not exist for long as arbitrageurs would quickly close this gap.

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