Market continues to bounce back this week

29 Aug '08

5 min read

NY futures lost some ground this week, with December dropping 48 points to close at 69.36 cents, while March fell 77 points to close at 73.99 cents.

The market continued to bounce back and forth in rather erratic fashion this week, but it was unable to generate any momentum whatsoever. Even though yesterday's rally looked promising at first and volume was picking up, the bulls' enthusiasm was tempered this morning when open interest showed a decline of over 1'200 contracts.

This indicated that the run up was primarily a function of short-covering rather than any new buying, and as a result the market quickly retreated towards the middle of its recent trading range. Over the last four weeks the December contract has closed within a narrow range between 71.89 and 67.08 cents and turnover has been lackluster, while open interest is still at the same level it was two months ago when December was trading over 80 cents.

The market's performance this week was certainly disappointing, because there were several factors that could have inspired a move higher. For one there is the threat by Hurricane Gustav, who is on track to hit the cotton areas of the Delta early next week, almost exactly three years after Katrina devastated the region.

Hurricanes typically do not cause that much damage to cotton, but this time around it may be different because the whole Delta region has received excessive moisture over the last 30 days that has already led to some boll rot and the last thing these fields need right now is another round of 4 to 8 inches of rain.

Following behind Gustav is Hurricane Hanna, which is on course to make landfall somewhere near Florida or the Southeast next Tuesday, where several cotton areas have just been visited by Hurricane Fay. It looks like the old saying 'as goes South Texas so goes the US crop' still has some validity, since we have yet to see an area that makes it to harvest without any problems.

Another factor that should act in support of cotton prices is today's Census Bureau report called "Consumption on the Cotton System and Stocks". Not only was domestic consumption for July reported at a pace of 4.65 mio bales, but what caught our eye were the carry-over stocks of just 9.53 mio running bales, which include an estimated 700'000 bales under 'Elsewhere', mostly bales in transit or in storage locations not captured by the Census Bureau.

First of all, with the transportation problems we have had recently this 'Elsewhere' number seems to be on high side, but even if we were to believe it, the US Census Bureau stocks would still be about 0.4 mio statistical bales below the latest USDA ending stocks number of 10.2 mio bales, because the 9.53 mio running bales of the Census translate roughly into 9.8 mio statistical bales.

Therefore, what is likely to happen is that the USDA will eventually adapt the lower ending stocks number of the Census, a fact that seems to have gone unnoticed by the market so far.

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