Cotton prices to play catch up in the weeks to come

27 Nov '09

5 min read

Then there are the basis-long positions that international merchants have established several months ago in India, Uzbekistan and some other origins. Since the futures market has gone up much faster than the corresponding physical position, the basis is out of kilter and merchants are not willing to sell anywhere near the price ideas of mills, waiting either for a break in the futures market or a rise of physical prices.

With fundamentals and technicals both pointing in the same direction at the moment, it is difficult to envision that anything could derail the current bullish trend. As we have stated repeatedly, it would probably take a macroeconomic event to stop this bullish train in its tracks. However, over the last couple of days there has been a development that has the potential to do that. What we are talking about is the emerging debt crisis in the United Arab Emirates.Dubai World, a government investment company with 59 billion dollars in liabilities, is seeking to delay repayment on much of its debt.

As a result the spreads on credit default swaps, which are like insurance premiums for debt, have risen sharply, not just in Dubai, but in the whole region. Some fear that this could be another "Lehman Brothers" that may trigger a negative chain reaction in the world's financial markets. Although Wall Street has been closed for Thanksgiving today, stocks and commodities around the globe have reacted very negatively to the news and it remains to be seen what the fallout from this is going to be.

So where do we go from here? The fear of another debt crisis, this time originating in one of the emerging markets, has taken center stage over the last couple of days. The danger is that the high level of confidence that markets have achieved since March is once again shaken. As traders are reminded that the investment world is still full of landmines, they may decide to cash in some of their holdings in stocks and commodities, which would at the very least trigger a severe correction. Although cotton's fundamentals still point to higher prices in the longer term, we see a bumpy ride ahead of us and believe that traders need to take the necessary precautions.

Plexus Cotton Limited

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