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Low cotton cultivation in 2009 will help support prices

23
Oct '08

This week's report represents comments from a speech given last week by Dr. O.A. Cleveland at the International Cotton & Textile Summit Forum held in Jinan, China.

Cotton, we knew had not shared in the 2007 price rise experienced by all other commodities. However, I did suggest to you that by late 2007 and into 2008 that cotton prices would rocket higher... and we did see New York cotton futures prices increase about 45 cents in March 2008.

At that time we recognized that the outside markets were controlling the cotton market. There is one thing for sure as I look out the next twelve months, the outside markets will continue to control the cotton market... and the corn market will control cotton more so than any other commodity market, including the value of the dollar and other international currencies.

Europe, China and other Asian countries, India and South America are also experiencing the same financial and economic chaos that has hit the United States. All will recover, but none will recover quickly. In fact, it is likely that it will take at least five for the U.S. to recover, and possibly longer. Part of the collapse in commodity prices came about because index funds, speculators and anyone with cash assets in futures were forced out of commodity futures positions en masse.

Another portion of the collapse in commodity prices had its roots in the completion of the Beijing Olympic Games. Leading up to the 2008 Olympics, the Chinese government had constructed the equivalent of one city the size of Los Angeles, California each and every month for four consecutive years. The end of the Games meant the end of possibly the biggest building program ever conceived by mankind.

We do know, however, that in times of chaos that market price overreacts. Prices either move too low or too high, depending on the crisis. Thus, while we can be content that prices will not fall much further as most the price decline in the stocks and commodities, including cotton, has been overdone. However, prices will rebound. Yet, the real question is how quick?

Since March 2008 we have seen corn and soybeans lose all the price increase they had achieved during 2008, but those same commodities have been able to maintain their 2007 price gains. Cotton, however, not only lost all the gains it made in 2008, but MOST all the price increase it had gained during 2007. Cotton is now near its 24 month--two year--low.

The decrease in cotton prices has been associated with the economic slowdown around the world. In February, 2008, when we were all very bullish, world consumer demand for cotton began to fall. Yet, because grain and oilseed prices had maintained their 2007 price gains, cotton prices initially held some of its gains. The primary reason was the concern that 2009 cotton prices had to remain strong to insure that 2009 cotton plantings would be sufficient to meet world demand.

Yet,as consumer demand for cotton decreased and the 2008 world cotton crop began to get larger and larger, the cotton market began to lose its luster. While the U.S. consumer has been the big economic engine that led the increase in world cotton consumption, the Chinese consumer has recently laid claim to being the world leader in the year to year increase in cotton demand.

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