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New York cotton futures continue gaining
Dec '08
NY futures continued to move higher this week, with March gaining 82 points to close at 45.28 cents, while December'09 advanced a more substantial 248 points to close at 51.48 cents.

The cotton market is still caught between two opposing forces that for now keep it more or less in balance. On the one hand we have a deteriorating global economy and falling consumer demand, but on the other hand we have government support countervailing these free market forces, be it via direct support for cotton like in the case of India and China, or be it via very accommodative monetary measures that are likely to lead to inflation and a weaker currency over time.

Every Thursday the US export sales report provides the market with a reality check - and recently it hasn't looked pretty! Last week net sales amounted to just 78'200 running bales, after sizeable cancellations, mainly from China and Hong Kong, reduced gross sales by nearly half. For the last three weeks we averaged only 93'400 running bales per week, but despite this horrible performance we saw the futures market gain about 15% during that time frame.

Shipments were disappointing as well at a marketing low 181'700 running bales, which brings total shipments for the season to 4.6 mio statistical bales. Unless both sales and shipments increase over the coming months, it will be rather difficult to meet the already reduced USDA estimate of 12.25 mio bales. Quite frankly, given the state of the global economy we don't feel that exports will exceed 11.5 mio bales this season and even that number may prove to be optimistic.

The biggest news this week came from the Federal Reserve, which announced a new battle plan to counteract the overwhelming deflationary forces that have gripped the economy. Until now the Fed must have felt like David trying to fight Goliath, as it tried to combat a 14 trillion dollar collapse in the US equity and housing markets with a measly trillion or two in countermeasures. But on Tuesday the Fed not only went for a Zero interest rate policy, but it also vowed to stimulate the economy through open market operations and other measures, like purchasing large quantities of agency debt and mortgage-backed securities.

In simple terms, the Federal Reserve is now officially the buyer of last resort with unlimited powers, because it can literally print all the money it wants to buy assets in the real economy and it won't stop until this deflated bubble is blown up again. So far these proclamations by the Fed are just intentions, but in the weeks and months ahead we will see them put into action and this will sooner or later lead to inflation and a debasement of the currency.

The reaction by currency markets was clear in that direction, as the US dollar weakened substantially after the Fed announcement, accelerating an already deteriorating trend. Gold rallied as well, another sign that the market is getting increasingly worried about all this money printing. Nevertheless, despite the increased potential for inflation somewhere down the road, most economically sensitive commodities were focusing on the here and now and did not follow precious metals higher. Crude oil for example was trading at a four-and-a-half year low this morning, down nearly 110 dollars a barrel from its all-time high this summer. Crude oil is a good indicator of whether money is flowing back into commodity index funds or not, and for now the answer is clearly 'no', which means that cotton is not seeing a lot of new investor money either.

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