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Increase in cotton volumes saving grace to falling prices
17
Nov '08
Encouraged by the USDA supply/demand report that held the estimate of our export potential steady instead of an expected cut, the cotton market began the week with the little bump we have grown to expect on Monday. However, before the day was out, prices had reversed course heading to new contract lows and technically posting an outside range day to the downside: a very bearish signal.

However, after setting new contract lows for the fifth consecutive session prices bottomed mid-week led by the spot December contract. The CRB index of 19 commodities ended at the lowest close in five years the next day. Volume in cotton futures picked up sharply with Thursdays volume was the best in exactly 5 months; since June 13th.

Without a doubt the spotlight this week was on the spread between December cotton, which goes into delivery Friday, and the March cotton contract. Several sessions last week, volume in spreads exceeded 80 percent of the total.

Often times, unusual changes in differences between months just before delivery are pre-cursers to what is going to be delivered or taken. Add in that cert stocks dropped below a million bales for the first time since mid April. Over 3/4 million bales have come out of the cert stocks since late July. While this is probably the cheapest good quality cotton available considering that new crop is headed straight to the loan, if a delivery squeeze was in the making, the market acted like plans changed Friday.

Retail sales in the US dropped in October by the most on record, pushing the economy toward the worst slump in decades. It is hard to be a demand side bull with economic news like that. After all it is the consumer and what they do with their disposable income that has the ultimate say so on the demand side of the supply/demand equation.

Open interest in cotton futures has now dropped to only 48% of the record open interest set last March when the funds were blowing and going in commodities in general.

With most new crop cotton going straight to the loan and the market too low to provide much of an equity to the producer, the good quality certificated stock could be very attractive to one or more shippers. If so, This could very well explain the possible bottoming action of the December contract. After all, US cotton IS the cheapest in the world. As of Friday morning, US growths were THE two cheapest in the Cotlook Index.

December cotton, that goes into delivery next Friday, ended the week at 4103 down 27 for the day, 104 for the week but 412 over the AWP and 433 above the mid-week low. However, March 2009 and beyond will continue to be held hostage by the macro economic developments of the global recession and strength in the US dollar.

Hopefully, we may have found at least a near term bottom in cotton futures but more than likely not THE bottom until the global economic picture improves particularly in China where the textile industry has continued to deteriorate. Sharp market rallies of five to 10 cents, and they will come, will give producers chances to move their loan equities.

Technically, we now shift to the March contract. March still needs to show the ablitiy to close back above 4500 to gain respect or warn of an impending significant rally because currenly it is on a path to reach the middle to lower 30's. There are believed to be buy stops above the 4445-4470 area.

Swiss Financial Services

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