NY futures give up further ground this week

12 Dec '09

6 min read

There is no denying that the current statistical situation looks extremely tight. Mills may not yet fully appreciate this situation, because at this point there is still enough cotton available, but as we head through the second and third quarter of 2010, there will be a scramble for available supplies, especially in the premium quality segment.

However, as we have pointed out at the beginning, the trade is still in the process of digesting these higher prices, while speculators have taken the foot off the gas pedal in light of some of the developments that we are seeing in the capital markets. The Dubai debt crisis has served as a reminder to hedge funds that there are still plenty of problems out there and just over the last couple of weeks we have seen a number of debt markets downgrades.

Greece, Mexico, Spain and Portugal had either their credit outlook and/or ratings lowered recently, which has prompted some traders to lighten up on the dollar 'carry trade' and that has led to a rebound in the greenback. The world may have become a bit too complacent after stocks and commodities traded to their biggest percentage gains in several decades this year and we are now seeing a return to a more cautious attitude, which could move some funds to the sidelines. Year-end bonuses are another factor that may prompt some fund managers to cash in some of the phenomenal profits they achieved with commodities this year.

This week the Tanzanian quote was finally dropped from the A-index, which means that Pakistan is now by far the cheapest quote in the group at 71.25 cents, while the other four quotes (Indian, Mali, Uzbekistan and Ivory Coast) are all between 77.00 and 77.25. As expected, we are currently seeing the spread between world prices and the futures market move back towards a more traditional difference and there are probably a few more cents to go.

So where do we go from here? The market seems to be in a transition period, with the leadership in this bull market shifting from speculators to the trade. However, while speculators have become much less involved recently, the trade doesn't seem to be quite ready to take over at this point. Nevertheless, the supply/demand situation paints quite a bullish outlook for the remainder of the season and we feel it is just a matter of time before higher prices will be forced on anyone who is still in need of cotton. In the near term we may see some more weakness, as a two-month uptrend line has been broken today and March may have to fill at least some of the gap that was created on the continuation chart when December left the board at 70.30 cents. However, any deeper correction presents a buying opportunity in our opinion!

Plexus Cotton Limited

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