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(October 27, 1997) COTTON:
Cotton bulls have a lot to cheer about this week. With the world
going to hell around them, cotton prices managed to post a half-
cent gain, a valiant effort in the midst of all this
adversity.
This is surely a consequence of good values and too
much company on one side. Although the market was initially shored
up by weather concerns in Pakistan and India, that pales in
comparison with the focus on the quality of business on the books
in Southeast Asia and the prospects for a sharp downturn in their
consumption. Surely there's no explanation for this unexpected
stability except for what we have said: prices are attractive to
the mills, they are not attractive to growers, and the large
speculative position could be getting restless.
The victory for
the bulls is the first one in six weeks, overdue in the normal ebb
and flow of events, perhaps, but still a real achievement. My
market sense is there's a bit more to go on this swing. There will
be some speculation that harvest time lows have been made, as
preposterous as that would have been to us a few weeks ago. Traders
will point out that the grain markets' lows are well behind them,
perhaps signaling better prices in the major commodities spectrum.
Well, that's farmer talk. The Chinese are steering the demand side
of grains, and seem to be working on the reverse side of cotton.
That keeps it from being easy.
The markets continue to attract
more and more money. We have seen record levels of open interest
set these past ten days in cotton, orange juice, wheat, and soybean
meal. At the same time, the open interest in soybeans is better
than 20% below the record set back in 1980, with corn 30% below its
record of early 1996.
We are all asked how this financial crisis
will impact consumption with the tigers, which is flattering, but
beyond our expertise. The currency crisis is not new, but the Hong
Kong crash brought it back to the front page. We have already
shipped 80,000 bales to Indonesia, Malaysia, The Philippines, and
Thailand, with 381,000 bales sold but not shipped. We shipped
865,000 bales to those markets last season, down from 1.3 million
bales the season before and 1.6 million two seasons ago. Quite
obviously our cotton has lost ground to Australian and Uzbek
growths.
Seat-of-the-pants estimates of the consequences for
cotton from this crisis is a loss of one million bales of
consumption in those four countries, a 25% loss. That seems high to
us. Certainly that portion of those Asian factories which are
turning out goods for Macy's, Liz Claiborne, Tommy, Polo and all
the others will not be shut down. A spread of the currency problems
to Hong Kong would expand the problem, but we suspect it's a good
bet that China will not accept a devaluation this early in its
management of the former colony.
An even greater burden of proof
has been put on the bulls by this week's events, making a long-term
recovery that much more difficult. However, prices are relatively
cheap.
Herman S. Kohlmeyer for Ernest Simon
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