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NY futures settle slightly higher this week
26
Sep '08
NY futures settled slightly higher this week, with December adding 90 points to close at 61.66 cents, while March advanced 86 points to close at 66.20 cents.

During a week where the financial markets were at the brink of collapse, it was quite an achievement for the cotton market to hold itself together as well as it did. After the December contract had briefly dipped below 60 cents last Thursday, the market experienced a strong bounce early in the week, but this rally attempt quickly fizzled since there was no volume behind it. However, with open interest declining significantly over the last few sessions, the bears don't have any momentum either and we may therefore have a market in transition, waiting for new direction.

The latest ICE spec/hedge report told a slightly different story than in recent weeks, as 'hedge' longs (presumably related to index funds) liquidated over 11'000 contracts last week, while trade shorts covered nearly 8'500 contracts. Both spec camps were on the buy side for a change, with long speculators adding nearly 800 contracts and spec shorts covering 2'100 contracts.

We believe that this heavy hedge long liquidation was related to Lehman Brothers, AIG and possibly some other groups that needed or wanted to get out of commodity investments. However, the decline in trading volume this week seems to indicate that for now the worst of this liquidation process is behind us.

US export sales have been quite encouraging over the last two weeks at more than 700'000 running bales combined, which brings total sales for the season to 5.6 mio statistical bales, of which around 1.8 mio bales have been shipped so far.

When we look at the current statistical balance sheet of the US, we started the season in August with a revised 9.8 mio bales in beginning stocks, of which 5.6 mio bales have so far been committed for export and around 2.0 mio bales have been booked by domestic mills, assuming their coverage is up to Dec/Jan. Since basically all of these export and domestic commitments will be supplied out of existing stocks, it leaves just about 2.2 mio bales of old crop cotton for sale.

We all know that the financial situation of the cotton trade as a whole has been severely compromised due to the events earlier this year and it has therefore become very burdensome to carry inventory in the current market environment. Owners of such old crop inventory have been eager to reduce their exposure over the last few months, which led to the kind of price pressure we have witnessed since June.

The good news is that we are finally getting to the tail end of this old crop inventory, with only a little over 2 mio bales left for sale. If we further consider that around 1.4 mio bales are currently in the certificated stock, there is really not that much cotton left for sale.

Our point is that once this old crop inventory is gone, the market will feel like a big burden has been lifted off its shoulders, because new crop cotton is playing with a different set of rules, having a full nine months of government loan financing available. It is therefore highly unlikely that new crop cotton will be available at the current cheap price level anytime soon.


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