Cotton futures fall precipitously in last fortnight

11 Jul '08

5 min read

However, after a period of contraction we expect there to be an inflection point at which the remaining players will be able to ask for higher prices, which will then set an inflationary spiral in motion. In other words, we may enter an extended period of stagflation in which economic activity grinds to a halt but prices increase nonetheless. Timing-wise we typically see an economic slowdown first, which may temporarily cause pressure on prices and in a second phase there is inflation and a further weakening of the currency, which tends to cause a sharp increase in nominal prices.

We believe that we are currently in the first phase during which we could see some demand destruction as the world economy slows because of higher oil prices. While consumers need food and energy in their daily lives and they buy precious metals as a store of value, cotton is a discretionary item and therefore more susceptible to demand destruction than some of these other commodities. We therefore see it difficult for prices to rally much in such an environment. Inflation will eventually save the day, but it may be a while before that happens.

From a technical point of view the cotton chart does not look very inviting at the moment after several support levels were broken and moving averages have turned down. It will take some time to repair the chart and the best we can hope for at this point is for this week's lows to hold, which would allow for some consolidation and base building and eventually set the stage for another rally attempt.

Plexus Cotton Limited

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