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NY cotton futures retreat in reaction to USDA report
Jan '09
NY futures retreated this week, with March giving back 184 points to close at 48.53 cents, while December dropped 265 points to close at 54.06 cents.

The positive feedback loop between the AWP and the futures market that had propelled the market higher in recent weeks was interrupted when the market sold off on Monday in reaction to the USDA report. Even though the USDA report on cotton wasn't seen as negative, it was the surprisingly bearish grains report that dragged the cotton market lower.

Actually, when compared to expectations the USDA report should be considered as friendly to the market. First of all, we had a 570'000 bale drop in the US crop to just 13.0 mio bales, which is a considerable 6.2 mio bales less than a year ago. Secondly, despite all the doom and gloom surrounding the global demand picture, it was actually the production side that saw a steeper drop last month. While world demand was scaled back by 1.35 mio bales to 115.24 mio bales, world production fell by 1.72 mio bales to 109.84 mio bales.

In other words, according to these USDA numbers we still have a seasonal production gap of 5.4 mio bales, which if true would not justify such low prices.

Of course most analysts are quick to respond that these USDA demand numbers are still too high and we have to admit that we belong in this camp as well. But the crucial question is 'just how much too high are they'? Compared to last year's world consumption figure of 122.69 mio bales the USDA is already showing a drop of 7.45 mio bales, or a little over 6%, but many traders believe that the real consumption number is somewhere in the 105 - 108 mio bales range, which would represent a 12.0 - 14.4% collapse. Could it be that the market's perception on consumption is too negative?

Interestingly, when we look for evidence of such a steep drop in consumption, we cannot find it, at least not yet. For example, even though the press touted US December retail sales as a disaster earlier this week, we don't share this gloomy view, quite to the contrary! Excluding gas station sales, which fell nearly 16% due to much lower oil prices (a positive development!), all other retailers saw sales fall by only 1.5% in December, with sales at clothing stores coming in at 2.5% lower.

However, from a commodity perspective we need to bear in mind that these sales are measured in dollar volume and a 2.5% drop at clothing stores is hardly a disaster if we consider the enormous discounts that were offered to move inventory. Therefore, it is fair to assume that the total amount of goods sold has likely exceeded that of previous years. Another factor that has been helping sales lately is the extremely harsh winter we are experiencing in many parts of the globe.

The financial shock and the resulting credit crunch that started to unfold in September caused a panic-like move among retailers to get rid of inventory at all cost in an effort to raise cash, which in turn had a ripple effect through the entire supply chain. Restocking orders were postponed or canceled until the situation would become clearer and this has emptied the textile pipeline to probably its lowest level ever.Therefore, the perception at the beginning and at the end of the textile pipeline may look quite different. While a textile mill that has its orders postponed or canceled may conclude that the world is standing still, someone who sees at all the inventory being shuffled out the door at the retail level will probably get a different impression.

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