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The Rupp Report: Shaky Cotton Business

Jürg Rupp, Executive Editor

The effect on the cotton business of the turbulences in the international financial markets with rescue activities of the US government is not yet foreseeable for forthcoming weeks and months, says a recent report from the Germany-based Bremen Cotton Exchange. After cotton prices first had dropped substantially on the New York futures market, they slightly recovered until the end of last week because of the US government’s measures. In view of this development, the cotton futures trade even progressed quite vivaciously and enabled some sellers of US cotton to meet mill demand for near dates.

Impacts Not Yet Measurable

It was even an opportunity for some traders to reduce certified stocks for which the present level of carry in the futures market is no longer attractive. Thus, the so-called basic trader dominated. Those who have partly ceased from hedging their positions owing to the March financial debacle have probably observed the latest developments with a couple of worries.

The impacts on the cotton business are not yet assessable. Prices remained quite stable in spite of these agitations, while grain and vegetable oil prices dropped. The price for crude oil right now equals a ride on the roller coaster. Hopefully, the controversial discussed activities of the US government will actually contribute to calming the markets and renewing faith and trust.

Cotton Instead Of Cash

The investment bank Lehman Brothers was explicitly not included in the rescue activities of the US government and applied for protection under Chapter 11. With Lehman Brothers, the fourth-largest US investment bank was hit. Lehman was established 158 years ago by the brothers Henry, Emanuel and Mayer Lehman, who had emigrated from Germany and traded in cotton in Alabama. They had already taken up commodity trading in the 1850s, accepting cotton as a means of payment in their shop and selling the natural material against cash or other goods, leading to the establishment of a cotton agency business. In 1858, the Lehman brothers opened their bureau in New York.

Banking Collapse

The weakening US housing market was also a reason for the collapse of Lehman Brothers, which was involved deeply in this kind of business. Merrill Lynch, another well-established landmark on Wall Street, could only be saved by Bank of America, the second-largest financial institution. Severe impacts on the textile sector are feared. Last but not least, the rescue activity of the US government will be paid for by the taxpayer. This — so it is reported — will impact the consumers’ personal income, and, therefore, they will spend less money, including for textiles. Sales of US textiles decreased for the second month in a row in August. The largest retailers, including GAP and J.C. Penney, reported a further, substantial decline of their turnover in an annual comparison, despite the US government’s efforts to support the consumer by handing out cash windfalls.

Stable Prices

The effective prices for cotton did not follow the downtrend on the New York futures market to the full extent. Toward the end of the week, the quotations recovered again, further restricting the inquiries by the spinning mills. Many mill buyers consider the current yarn prices to be insufficient compared to the presently asked prices for the raw material. Furthermore, the required qualities for the near date are only available in reduced volume. Higher qualities from the new crop are not yet ready for delivery and were strongly purchased for later dates in expectation of eventually lower prices.

Reported turnovers were limited to Upland qualities: Central Asian sorts for prompt delivery, later in the fourth quarter 2008 and in the first quarter 2009; Greek types for the fourth quarter 2008 and West African types for dates in the fourth quarter 2008 and first quarter 2009.

October 1, 2008