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Crude oil trades lower
18
Aug '08
Despite a bullish supply/demand report from the USDA, cotton prices got caught up in a wave of technically inspired speculative selling and persistent rumors of liquidation by index or ETF "long only" funds.

So you can see why the recent collapse in crude oil and gold as the US dollar strengthened spilled over into grains and cotton as the fund managers either scrambled to limit losses or to raise funds.

The price breaks were swift and vicious. December cotton touched limit up at 7174 on Tuesday following the USDA report and actually traded above 71 cents on both Wednesday and Thursday. Then on Friday, December cotton crashed to new lows for month as the week came to an end.

December cotton finished the week at 6708, down 466 points from the highs of Tuesday morning and down 209 for the week.

The CRB lost 500 points for the week which takes that index back to the levels of late March. However, because of Fridays surprising break, cotton was hit harder than other row crops. Crude oil lost $1.43 but traded as much as $2 lower. However, the real killer was gold that lost a staggering $71 per ounce and silver $2.52.

Granted, The strong dollar and rains in West Texas were mentioned as factors effecting cotton but more than likely, it was the extreme weakness in outside markets, particularly gold and silver, caused by selling from those funds and ETF's that really took its toll on cotton.

This month's USDA supply-demand reports had been considered sufficiently constructive to provide a base for higher prices. However, the markets failure Thursday and Friday left fundamentalists shaking their heads and grabbing their pocketbooks.

As usual, skeptics argued over various areas of the supply/demand data but in the end, USDA work rules. Production forecasts for Texas were argued to be far too high but on the other hand world consumption was argued to be too high also.

Export sales reported last week were considered quite good although they obviously had no effect on the market. Total sales of Upland and Pima amounted for right at 400,000 bales including 177,000 bales to China.

The market closed Friday well below levels previously thought to be quite attractive to both domestic and foreign mills. However, for cotton prices to improve, they must first stabilize and show that they can detach themselves from the influences of the other markets. It is an absolute certainty, cotton will eventually participate in the acreage battle for the 2009 crop.

Going into Friday, cotton's open interest was down only about a thousand lots for the week. If open interest dropped sharply Friday, it will help build a case that Fridays low will be the near term low. The last few spec/hedge reports showed the spec communities propensity to build a short position. In all likelihood that is what allowed the brief limit up move on Tuesday.

Extremely good, widespread rains in West Texas over the weekend. Temps and sunlight factor in September and October will now provide the catalyst for a swing factor of probably a half million bales.

Technically, the multiple lows around 6900 had drawn the "battle lines" between weak technicals and fundamental demand but three consecutive failures above 7100 last week weakened the bull case. Fridays break of 6900 signaled resumption towards the 6700 target. However, I believe this is now a logical point for a bounce. A close above Thursday's 7145 this week would attract a bullish following.

Swiss Financial Services


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