NY futures rebounded this week, with March surging 975 points to close at 126.34 cents, while new crop December advanced 586 points to close at 93.82 cents.
After falling by some 40 cents in a matter of just two weeks, the futures market has finally regained its footing and is climbing up the hill again.
Last week we commented on the huge spread that existed between NY futures and the physical market (over 30 cents between NY March and the A-index), meaning that either the futures market was undervalued in relation to cash prices or vice versa. Judging by how well the physical market has been holding up during the sell-off in New York, with overseas mills continuing to pay prices in the 140's and 150's for US cotton and the A-Index never dropping below 143.35 cents, it became evident that the futures market was overextended to the downside and eventually had to bounce back.
The surprisingly strong US export sales report of this morning reinforced the market's already bullish sentiment. For the week that ended on November 25 combined sales for both marketing years amounted to 636'900 running bales of Upland and Pima cotton. This brings total commitments for the current season to 13.5 million statistical bales, of which only 2.8 million bales have been exported so far. For the 2011/12 marketing year there are already 1.3 million bales on the books and we expect the majority of these bales to be shipped from existing stocks during the August/October window.
Last week's export sales were spread among 23 different markets, although China accounted for the lion's share with 496'000 bales. We have long held the belief that China is lagging behind with its US purchases, because it has bought "only" 4.6 million statistical bales so far this season and about 0.3 million for August onwards.
We say "only" because China is expected to import some 15-17 million bales during this marketing year in order to bridge its large production gap. Since we estimate the US to have no more than 2.5 million bales left for sale at this point, China can't rely on US cotton to fill its needs and will therefore have to aggressively pursue other origins during the remainder of the season (India, Africa, CIS, Brazil and Australia), which in turn should keep physical prices well supported.
It is becoming obvious that we can no longer look at the cotton market or any other market for that matter the same way we used to. We believe that we are in the midst of a huge shift in the financial world, which stems from the ongoing breakdown of the fiat currency system. We have all been conditioned to look at values of things in 'nominal' rather than 'real' terms.
For decades the US dollar, as well as other fiat currencies, have been used to express the value of commodities and other financial assets, but these denominators are no longer the constant they used to be. These currencies are slowly but surely being destroyed bycentral bankers and governments who print them with reckless abandon.
When we measure the price of cotton in a currency that is being debased, like the US dollar or the Euro, we are seeing a strong rise in nominal terms. However, when we replace the US dollar with gold, silver, copper, crude oil or even soybeans, wheat and corn, we get an entirely different outcome. When we plot a chart of the cotton price measured in ounces of gold, silver, barrels of crude oil or bushels of grain, we will find that cotton has simply been playing catch up with other commodities.
For example, since the credit bubble went into overdrive about 5 or 6 years ago, cotton has more or less doubled from what used to be a 60-70 cents base. During the same time frame silver has gone up four-fold, gold three-fold, copper and crude oil more than two-fold, while corn, soybeans and wheat have also about doubled in price.
Are commodities going up in value or are we simply witnessing an erosion of the purchasing power of fiat currencies? We are not just talking about the US dollar, but any currency that is based on nothing more than promises. That's why it is immaterial whether the US dollar is sinking a bit faster than the Euro at any given moment or vice versa.
The US may have the biggest pile of 'empty promises', but the situation is hardly any better in Europe and many of the Asian economies. In the broader context it may simply boil down to comparing tangible goods (commodities) to an ever-increasing amount of empty promises (currencies). As investors are starting to catch on to what is happening to their traditional store of value, they are increasingly looking to diversify into value-preserving assets, such as commodities.
And here is the scary part! There are currently about 90 trillion dollars in the global bond market and about 40 trillion in global equities, while commodity index funds hold just about 0.34 trillion dollars and hedge funds may own another 0.2-0.3 trillion in commodity investments. Imagine what would happen if even a small percentage of these bond and equity holdings decided to switch to commodities!
So where do we go from here? A persistently strong physical market has forced a turnaround in the futures market. With only about 10-15% of the US crop remaining available; it is unlikely that there will be any pressure on physical prices for the remainder of the season. Quite the contrary seems to be the case! Importers are scrambling to lock up remaining supplies before they run out altogether, which is underpinning prices.
Under such a scenario the futures market will continue to follow the lead of the cash market. We have no idea how high cash and futures prices may eventually go, but the thinner the market gets, the more dangerous and volatile it will become. We have never had a season in which nearly the entire crop was committed this early on and it will be interesting to see how the upcoming delivery periods of March, May, July and also October are goingto deal with this situation. Don't be short unless you have the cotton to back up your bet!
Plexus Cotton Limited
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