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'Do cotton fundamentals matter anymore', ask traders

14
Oct '08
Do cotton fundamentals matter? No, not in the short run and very probably not for the next six months, or at least until February. Until then it will all be about the consumer and how they react to the current credit crisis, debt crisis, liquidity crisis or whatever name one elects to use.

The consumer has always been the key anyway. However, today's consumer in the Americas, Europe, Asia, Australia and Africa is more concerned about personal wealth, both long term and short term, to worry about their specific purchases.

They want to preserve their home, their automobile, and their family's health more than anything. New clothes, towels, sheets and other consumer goods, both durable and non durable, will suffer from a measured drop in demand.

Thus, cotton fundamentals, with the exception of the lack of consumer demand, are of no interest to the market. It is all about demand and cotton will not have an instrument playing in the demand band for a number of months. The U.S. was the big economic engine that had been driving a global increase in cotton consumption. Additionally, the Chinese consumer had become the fastest growing consumer of cotton goods in the world.

The Chinese consumer is likely be less affected that western consumers, but the great manufacturing and export machine so skillfully developed by China will face employment reductions and a slowing of their economic growth rate.

The new millennium began with China experiencing and annual economy growth rate in double digits; and that continued through 2008. Yet, for 2009, Chinese growth is expected to tail off to no more than eight percent; still strong, but with a significant slowing.

We wrote a couple of months ago of a slowdown in the demand for all commodities in that the great Beijing Olympics had concluded and with that the end of the greatest five year program of construction and infrastructure development in global history.

While that was significant to the commodity markets, it had no relation to the collapse of the credit and capital markets that has thrown the world in to a crisis that will require a bare minimum of five or more years of economic struggling.

Thus, cotton production, at the farm level, is presently now a less attractive crop than it has ever been. In a world whose major problem is liquidity/credit, the risk associated with borrowed capital to grow cotton makes it difficult for many to consider cotton in their 2009 planting decisions.

Likely, the market will require 6 to 18 months to find its footing. In the meantime, price activity will be little more than back and forth action. World ending stocks, per USDA's supply demand report that was released just Thursday, are projected more than 3 million bales above last month's estimate and now stands at 55.5 million bales. Too, the estimate for U.S. exports was dropped another 1.5 million bales, down to only 13.0 million for 2008-09.

December will not see sixty cents again. Just when the fundamentals had become very bullish, the world economy has all but collapsed and cotton will now ride the low road. Yet, the market will climb back to the mid fifties, but likely not until after the December expiry.

Bayer CropScience


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