NY cotton futures decline as negative vibes in yarn market

25 Feb '12

5 min read

This is achieved via imports of cotton and yarn, which is bought at international prices. With imports expected to amount to around 18 million bales this season, it more or less matches the amount export oriented companies need.

While Chinese support may be fading in the months ahead, there are a few other factors that may prevent cotton from dropping much lower. Cotton is now definitely falling behind against competing crops, particularly when compared to new crop soybeans at 12.67 dollar/bushel, and this could still alter planting intentions. Also, recent developments on the monetary front should support commodities as an asset class, although this may not play out in the very near-term.

The Federal Reserve, along with central banks all over the globe, is keeping interest rates below the rate of inflation in an attempt to force sidelined money back into assets like stocks, commodities and real estate.

It is quite remarkable that the 10-year treasury yield of less than 2 percent is below the official US inflation rate of around 3 percent, which means that anyone investing in treasuries is actually getting a negative real return all the way out to 30-year maturities.

If measured against the unofficial inflation rate of around 6-7 percent, the loss is even greater. Investors are slowly but surely catching on to the fact that parking money in the bond market is going to burn a hole in their pockets. This is why we have seen a rally in stocks all over the globe recently and we believe that it is just a matter of time until new money flows into commodities and real estate as well.

So where do we go from here? From a technical point of view, it looks like the market is destined to test major support near 84 cents over the coming weeks. However, from a fundamental point of view it may be too early to throw in the towel, since mills are not well covered and still need to buy a lot of cotton that is currently carried as basis-long positions by merchants.

As merchants are selling their cotton, they will lift short hedges in the futures market, which in turn supports prices. Since trade selling against new crop will probably not happen on a major scale until planting is completed in the second quarter, we expect to see some choppy trading going forward, but the market is probably not ready to leave its long-term sideways trend just yet.

Plexus Cotton Limited

More Textiles News - United States Of America...