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Daily woldwide cotton market report
Mar '09
Last night in New York futures market, May 2009 closed at 44.31 with a decline of 72 points, July 09 closed at 45.28 with a decline of 69 points, while October closed at 47.90 with a decrease of 82 points. The spot rate of KCA declared settled at Rs. 3250/= with and increase of Rs. 25/= today. Nearly 7800 bales have been brought to records been sold.

According to Cotlook, there is speculation that at least an additional 500,000 tonnes of cotton will be purchased by China for state reserves and the textile export rebate rate will be raised to 17%. Another article from Cotlook reported that, “Keqiao Textile Index, (a broad measure of textile prices, supervised by the Ministry of Commerce), has risen for the third consecutive week from 90.35 to 90.46, amid continuing reports of an upturn in trading activity in the primary textile sector.”

If we just look at the cotton market in isolation, it seems to make sense for the market to be stuck in a relatively tight range. On the one hand we have very supportive US export sales, with 2.7 million statistical bales of new commitments over the last two months, and mills are generally operating at decent margins at the current low prices. On the other hand we still have several origins that have yet to dispose of huge inventories, such as Central Asia, West Africa and India, which keeps the trade from getting too excited about a potential rally.

However, as many of us have learned in a painful lesson last year, the factors that drive commodity markets go far beyond the traditional supply and demand issues of a particular commodity. In the years leading up to the 2008 market crash, we saw commodity markets become a new playground for index and hedge funds. By piling hundreds of billions of dollars into commodity markets they tripled and quadrupled open interest and eventually forced prices to explode to the upside, often in the face of fundamental reasoning.

Then in late summer of 2008 the financial meltdown ensued, leading to massive deleveraging in just about every asset class, with the exception of government bonds. In this panic-like rush to liquidity, hedge and index fund long positions were cut dramatically. In the cotton market, outright spec longs in the futures market dropped from 13.4 million bales a year ago to just 3.1 million bales last week, while index funds cut their net long from 12.3 to 6.0 mio during the same time frame. Over the last few months this long liquidation has subsided and we are getting to the point where money from these sources is starting to flow back into the market.

Ghulam Rabbani & Co

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