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Home / Knowledge / News / Textiles / Cotton futures fall precipitously in last fortnight
Cotton futures fall precipitously in last fortnight
11
Jul '08
NY futures fell precipitously since our last report two weeks ago, with December losing 819 points since June 26 to close at 73.58 cents, while March fell 834 points to close at 78.94 cents.

After the market had gained nearly 9 cents in the first two weeks of June, it ran out of steam and after a period of consolidation it gave it all back over the last two weeks. Volume was extremely light, both on the way up and on the way down, which made it relatively easy to generate these amplified moves. Over the last two weeks there were only two occasions on which the market traded more than 20'000 contracts, while open interest stayed relatively stable at around 215'000 - 220'000 contracts.

Apart from an obvious lack of cash business at higher levels, a markedly improved situation in West Texas and some weakness in the grain and soybean markets, which all did their part in putting pressure on cotton prices, we also sense a growing fear among market participants in regard to escalating oil prices.

Crude oil, and energy in a broader sense, is the lubricant that makes any complex society work. It forms part of nearly all products and services and the fact that crude oil has gone up nearly 1300% since 1998 is a threat to the world economy.

The problem with crude oil is not so much that we are running out of it anytime soon, as even conservative estimates state that there is enough oil left to last another four or five decades. The trouble comes from what is called 'peak oil', which means that once an oil field has been depleted to a certain level, its productivity starts to drop because it becomes more difficult to bring the remaining oil to the surface. Since most major oil fields have been in use since the 1970s, their daily production capacity is expected to decrease over the coming years, at a time when world demand for energy is increasing rapidly due to the growing demand from emerging markets. This has created a supply/demand gap, which is hard to overcome without the discovery of new oil deposits or alternative energy sources. As a result of this looming imbalance, the price is rising in an effort to ration demand. Making matters worse is the huge influx of index fund money, which has created large blocks of permanent long positions that tend to amplify an already bullish market scenario.

This increase in energy prices has led to a major margin squeeze, as the cost of production and transportation has gone up considerably but companies have so far been unable to pass these increases on to consumers, since they themselves are suffering from these higher energy prices with escalating gasoline and utility bills.

In the case of cotton this energy debacle is affecting both supply and demand. On the one hand it becomes much more expensive to grow a crop and we wonder how growers will be able to stay ahead if prices remain at 70 cents/lb. On the other hand we have textile mills that face a similar problem since they use a lot of energy to produce and transport yarn and fabrics. Without the ability to pass on these increases, we may lose bales on both sides of the balance sheet. Crop production will probably continue to decline next season, but mill use could also drop as consumers retrench and some mill capacity is being idled.


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