November 6, 2008

Cotton futures on the Intercontinental Exchange (ICE) fell to the lowest levels since early 2005 Thursday as weaker commodities and equities prices spilled over on the cotton market that was already facing options-related selling.

“As expected, stock and commodity screens ran blood red Thursday as the U.S. post-election euphoria faded, and the reality of global economic uncertainty reappeared like an inescapable cloud of dread,” one trader said.

USDA’s export report surprised the market this week. The 241,500-bale net new sales total was far better than anticipated and a vast improvement over last week’s 57,100-bale total. The best buyers for the week were China, Mexico, and Germany. Another unusual statistic was the 192,300-bale shipment figure, a total far less than observers have become accustomed to seeing lately.

“The cynical reaction to the shipment number is that if you’re worried that you might not get paid for a sale, the last place you want to have your cotton is on a boat at sea,” an analyst said. “From a purely statistical point of view, as bad as the market ‘feels’, it doesn’t appear that the export business has completely evaporated.”

Closer to home, spot cotton sales increased significantly as producers in Texas, Oklahoma, and Kansas sold 2,072 bales online in the week ended Nov. 6 compared to only 86 bales sold the previous week.

Meanwhile, U.S. retail sales figures were released this week, and same store sales for a cross section of retailers were, understandably, off significantly. The ICSC-Goldman Sachs Index was down one percent in October, the weakest October performance since 1969 when the Index was initiated. However, Wal-Mart, the world’s largest retailer, saw a 2.4 percent increase in same store sales.

Analysts say the figure was better than expected and showed the collective consumer now is “trading down” to shop at a discounter like Wal-Mart instead of the higher-priced, higher-margined department stores like Macy’s and Nordstrom’s. While consumers may eschew the purchase of a pair of $115 designer jeans, shoppers still will pick up a $25 pair of more ordinary-labeled denim pants, a trader explained. Therefore, while the dollars spent on clothing will decline, the total tonnage of purchased goods will not fall as fast.

“As the global economy melts down around us, it’s easy to fall prey to the doom and gloomers who would have you believe that all is lost, the end of time is upon us, and that cotton consumption is going to fall by 30 percent in the year ahead. Don’t believe it,” a market observer cautioned. “Thursday’s retail store sales figures proved a pretty clear insight as to how consumption at the end user terminal of the cotton pipeline is likely to play out.”

Cotton market observers now are turning their attention to USDA’s next supply/demand report which is scheduled for release on Monday, Nov. 10. Typically, USDA does not resort to drastic changes in its report, but many in the industry say the current economic landscape may leave the department no other choice but to catch up to reality and finally bring its world consumption number down by more than just a notch or two.

In its last report, USDA still was showing world mill use at 122.31 million bales which even the more optimistic traders believe to be at least 10 to 12 million bales too high.

“Even though many in the market do not believe in the current set of USDA figures, a historic demand reduction accompanied by a corresponding sharp increase in ending stocks is likely to send another shock wave through the cotton market,” a trader said. “Next Monday’s figures should be very interesting.”