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Plexus Cotton market report

16
Mar '07
NY futures retreated this week, with May dropping 105 points to close at 53.44 cents, while December lost 74 points to close at 58.10 cents.

Even though last week's advance looked promising from a technical point of view, there was simply too much overhead resistance from trade selling to allow the market to move higher.

What technical traders may not be aware of is that there is a government loan mechanism that generates an almost insurmountable amount of selling whenever the market reaches around 1100 points above the AWP. This resistance point has proven fairly accurate time and time again and with still around 11.1 mio bales sitting in the loan, we don't see that changing anytime soon.

At the same time, whenever the market drops to around 900-950 points above the AWP, the market finds it difficult to draw cotton from the loan and prices find support. Interestingly, due to the way this loan redemption mechanism works, the futures market is no longer a price setter, but rather a price follower, at least as long as most unsold US cotton remains in the loan.

This is due to the fact that US prices have only a limited influence in determining the world price. For example, if most other growths that make up the A-index are sold out, then the world price will rise, pulling US prices along with it no matter how much cotton is still left for sale.

However, having said that, we all know that US cotton cannot stay in the loan indefinitely, since the term with the government is for a maximum of up to 10 months only. Therefore, it either needs to be redeemed before this time is up or it will revert to the Commodity Credit Corporation, which will then proceed to auction off any forfeited supplies.


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