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Export sales of Upland & Pima cotton once again excellent

28 May '10

5 min read

Governments and central banks have sent a clear message to markets that they will stand by with whatever liquidity is necessary to avoid an implosion and this will sooner or later translate into inflation. Unfortunately there is not much else that can be done at this point since that debt problem has grown completely out of control. Even though markets have been focusing on Greece and some of the other European economies, the United States is actually the bigger culprit when it comes to debt. The government deficit-to-GDP ratio stands at 13.5 percent, which is higher than any European nation with the exception of Greece, while the total credit market debt-to-GDP ratio measures around 360%, which is higher than the 290% we had during the Great Depression. In our opinion it is just a matter of time until there will be a funding crisis that forces interest rates higher and the consequence from that is probably going to be stagflation. Under such a scenario prices of commodities and other tangible assets would rise in nominal terms and we therefore need to take this into account when forecasting prices over a longer period.

So where do we go from here? In the short term much will depend on China's appetite for imports. Judging by China's strong domestic prices and the difficult start to the Xinjiang crop we should see additional import demand over the coming weeks. Since there is not much current crop available anymore, it is still a possibility that at least part of the certified stock gets sold. Rather than focusing on spreads, we need to look at July and December in terms of their respective cash value, which is probably not too far from current levels. Since the cash market is likely to hold steady due to the tight supply situation, the futures market too should remain well supported near 80 cents.

Plexus Cotton Limited

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