'Christmas mood' - small gains in NY cotton market

24 Dec '11

5 min read

Plexus Cotton Limited reports that New York futures went nowhere this week in thin pre-holiday trading, as March edged up 95 points to close at 87.24 cents.

A look at the daily trading volume says it all, as the highest turnover amounted to just 9'136 contracts. Interestingly though, many of the traders that were active added new bets, because open interest increased by around 4'000 contracts since last Thursday. Obviously there are still some traders seeking protection against further declines, but there are also some new longs entering the market.

The Chinese Reserve continued its support by taking yet another 1.0 million statistical bales of domestic cotton into its stockpile, bringing the total amount to 8.2 million bales, not counting an estimated 4.5 million bales of imports. Many observers now feel that the Reserve will lift as many as 18.0 million bales of domestic and imported cotton off the market, which would be more than the global production surplus this season.

Late last week the Chinese Ministry of Finance also announced a new formula for its sliding scale duty in 2012. It raises the threshold at which a fixed rate duty is charged from around 81 cents/lb to 100 cents/lb and increases the sliding scale duty rate below this threshold. On balance this new structure is seen as slightly supportive, because it levies a heavier tax on cheaper imports compared to 2011. So far no sliding scale import quotas have been issued, but we expect that to happen early next year.

It is not just China that is trying to support prices. The government of Pakistan is apparently intending to buy 1 million bales (of 375 lbs each) through the TCP (Trading Corporation of Pakistan) in order to help out growers and ginners. However, while the Prime Minister seems to have already instructed the Secretary of Finance to arrange the funding for such an operation, mill owners and exporters are voicing their discontent and it may therefore be a while before a final decision is reached.

While the cotton market didn't provide a lot of excitement this week, there was a lot happening on the monetary front, as banks in Europe received an early Christmas present from the European Central Bank (ECB) two days ago. In order to preempt another liquidity crisis, the ECB offered an open-ended amount of very cheap 3-year loans to European banks.

Over 500 banks jumped at this too-good-to-refuse deal, engaging in loans of around USD 636 billion, although 'only' about USD 270 billion will be net new loans, while the balance refinances existing debt, albeit at a cheaper rate and with a longer maturity.

This aggressive move by the ECB is tantamount to money printing, because these new loans the ECB is extending to the banking system are created out of thin air. Although this money is a lifeline for the banks, it doesn't solve the fundamental issues, like the escalating debt bubble and massive unrecognized losses in the financial system. There is also an interesting political twist to this.

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