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Limit Up, Limit Down

Can I call you back? The market is limit up and things are crazy around here.”

I heard that from two different cotton merchants while making calls last month for Cotton Grower and sister publication Cotton International Magazine. To say the least, cotton futures have been on a wild ride – so wild in fact that it is risky trying to write about them in a column that comes out on a monthly schedule. In the market situation that we’ve been in recently, a significant change could have occurred by the time I finished writing this.
I receive a lot of market comments via emails and e-newsletters, and they reflect as much about the market’s mood as closing prices and open interest. Listed below are a few quotes that I have pulled from newsletters discussing NY Futures during the first week of March:

“I fear that the cotton market is broken …”

“The cynic in me wants to say, ‘I’ve fallen and can’t get up,’ in regard to the current cotton market.”

“The present cotton market doesn’t seem to be able to serve the role which it has dutifully performed for almost 140 years now. Price discovery isn’t supposed to be found off the screen and available only to those lucky enough to have secured a position in the option ring.”

“This was a day that the funds took some profits. Just take a look at the casualties … Perhaps cotton was punished the most severely. It didn’t take long for us to be limit down.”

“This is a combination of insanity and ignorance … But that doesn’t mean it will be fixed tomorrow.”

“The NY futures market, in no way, is trading near term the fundamentals of cotton, but rather perceptions of the future. For now, the market is considerably overbought, based on near term fundamentals.”

“The cotton market is not focused on cotton fundamentals, but rather the fundamentals associated with the grain contracts, relative to ethanol (energy) demand and the food crisis relative to vegetable oil consumption.”

According to people who buy or sell cotton – those who use the futures market as a hedge against price movements that affect their production and day-to-day business – the NY Futures market isn’t serving its original purpose. Instead, it is a virtual slot machine for one-armed bandit speculative funds whose endless supply of capital and absolutely no ownership of raw cotton create point moves that can’t be explained by any fundamentals.

By the time this month’s issue gets to your mailbox, it is anyone’s guess what the market will be doing. One thing is certain – you can count on change. But should the cotton industry be subject to wild, unreasonable market moves because spec fund managers are itching for a weekend at The Mirage? That’s not good for anybody, and the cotton industry needs to be extremely observant to how this develops in coming months. With a solid cooperative effort, the cotton industry can preserve the function of the NY Futures and give producers and merchants the hedge they need for the businesses.

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