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Cotton futures market comes under further pressure
Oct '08
NY futures came under further pressure this week, with December falling 322 points to close at 58.44 cents, while March dropped 325 points to close at 62.95 cents.

The current sentiment in the cotton market - and in just about every other market for that matter - is one of the most pessimistic we remember. Buyers seem to have gone on strike, while owners of inventories and investments are liquidating them in a desperate rush to cash. Markets have no confidence in tomorrow and are instead guided by fear, which is making it nearly impossible to run a normal course of business.

Just look at today's US export sales report, which came in at 111'900 running bales of Upland and Pima, bringing total commitments for the season to roughly 5.7 mio statistical bales, of which around 2.1 mio bales have so far been exported. With prices in the low 60's last week, this is about as disappointing as it gets.

Meanwhile, index fund related positions continue to get dumped, as the latest CFTC report clearly shows. For the week that ended on September 23rd, index traders liquidated 6'159 longs and 3'216 shorts and their net position has now dropped to 8.9 mio bales, which are 3.3 mio bales less than at the end of February.

Therefore, after we have seen hedge funds and traditional speculators exit their net long exposure over the last few months, we are now seeing index fund related positions being curtailed as well. There is no telling how far down these positions will be cut, but given the current financial and economic environment there is probably more liquidation ahead of us.

Open interest has fallen markedly over the last three weeks, with Futures now showing an open interest of around 19.5 mio bales, down by about 2.5 mio bales over the last three weeks alone and over 11.0 mio bales less than at the end of February. If we look at Futures and Options combined as reported by the CFTC, open interest has dropped from a high of 57.2 mio bales in early March to 36.5 mio bales at current, which is a reduction of nearly 40 percent.

This inflation/deflation cycle that we are witnessing is part of the same dynamics we are seeing in the financial markets. When credit was cheap and risk was regarded as insignificant, it allowed everyone from hedge funds to consumers to leverage up to levels never seen before. In early 2007, the average hedge fund had a leverage ratio of 32 to 1.

Thanks to the invention of what were thought to be 'clever' new financial products, risk was repackaged and in some cases sold as AAA bonds to the marketplace, which allowed these players to load up on even more bets. This huge house of cards finally started to cave in when the weakest pillar in this Ponzi scheme, subprime mortgages, started to get in trouble. Since then we have seen the biggest de-leveraging in history, which has led to an implosion of the financial system.

The US government, along with several others around the globe, is now trying to reflate this pierced bubble with additional liquidity. However, while these bailouts are addressing the immediate need to keep the game going and to instill some confidence back into the marketplace, they fail to cure what is fundamentally wrong in this part of the world. Over the last decade financial wizards tried to convince us that we would be entitled to indefinitely import goods by exporting financial claims in return.

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