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Unabated decline continues in New York cotton futures

10
Oct '08
NY futures continued their free fall this week, with December dropping 600 points to close at 52.44 cents, while March fell 608 points to close at 56.87 cents.

It is hard to believe that just a little more than three months ago, on June 27th, the December contract had settled at 81.40 cents, which would prove to be the last time the market closed above the 80 cents level. Since then it has lost nearly 30 cents or almost 40 percent of its value and there is no telling where this powerful downtrend will finally come to a rest.

While open interest held surprisingly steady during the first 20 cents of the decline, the last 10 cents saw a steep drop in positions due to widespread liquidation of commodities. Since September 15, when open interest still measured 220'037 contracts, it has dropped by 38'319 contracts or about 17 percent, to currently just 181'718 contracts. The selling of index fund related long positions led the charge to the downside, with trade shorts buying on the other side, but only cautiously so.

There are at least some buyers still out there according to the latest US export sales report, which showed that last week 272'700 running bales of Upland and Pima found a home overseas. Shipments of 249'000 running bales were not great, but still more or less in line with the seasonal average so far.

Total commitments for the current marketing year now amount to around 6.0 mio statistical bales and if we assumed that most of these bales will be supplied out of old crop, along with around 2.0 mio bales that domestic mills will take, then remaining old crop stocks should be down to about 1.8 mio bales, including the certificated stock.

This is important in terms of financing, which has given so many traders headaches in recent weeks and forced them to dump inventory. While old crop stocks no longer enjoy the benefit of government financing, new crop cotton will have nine months of loan financing available, which makes it somewhat less pressing for the owners of such cotton to sell it at just about any price.

While these cotton fundamentals may be interesting, they are not what's driving the market at the moment. Cotton, along with just about any other commodity, is being overwhelmed by the events in the financial markets, where we have seen yet another implosion this week, as investors sold just about everything but Gold and US dollars in a frantic flight to safety.

Despite desperate measures by Governments and Central Bankers around the globe, there seems to be no end in sight to this financial crisis that is spreading like a wildfire into all facets of the global economy. Efforts to restore confidence have failed miserably so far and policymakers are running out of options.

However, in his now famous 'deflation' speech of 2002, Fed Chairman Ben Bernanke gave us some insight into what's in his playbook in case all else fails. We quote:

"....the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets...."


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