NY cotton futures continue to head south

07 Nov '08

5 min read

However, as long as the economic outlook remains gloomy, the trade is likely to remain bearish and short, while badly bruised index and hedge funds are not expected to re-enter the commodities game in big numbers anytime soon.

By the way, there is no doubt in our mind that we are not dealing with a recession, but rather a depression. The difference between the two is that in a typical recession the business cycle overheats and the central bank responds by raising interest rates, which cools things down and then gives way to the next economic upturn. This is not what we are seeing in the current environment. Central Banks around the globe are lowering, not raising, interest rates in sheer desperation while injecting insane amounts of liquidity, and the economy shows no signs of revival. That's called a depression!

What the market is trying to figure out is how much demand destruction this depression is likely to cause, but that question is impossible to answer at this point. Traders fear the worst and until there is some transparency in regards to demand, they are likely to short first and ask questions later.

Next Monday the USDA will issue its next supply/demand report, which will give the market something to chew on. Usually the USDA doesn't resort to drastic changes in its report, but the current economic landscape may leave it no other choice but to catch up to reality and finally bring its world consumption number down by more than just a notch or two.

In its latest report it was still showing world mill use at 122.31 mio bales, which even the more optimistic traders believe to be at least 10 to 12 million bales too high. Even though the market does not believe in the current set of USDA numbers, a historic demand reduction accompanied by a corresponding sharp increase in ending stocks is likely to send another shock wave through the cotton market.

Plexus Cotton Limited

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