Despite the July contract coming off the board this week NYF were very quiet with December at 59.50 c/lb, down 34 points in the week. 

Fears over a second spike in the US continue as the highest daily rise in infections was seen last Thursday. Around 47 million people have now applied for unemployment benefits in the last three months, with an additional 3 million claims made in the last two weeks. Further lockdowns in the US would be critical for the economy and the already precious retail sector. Europe too has seen massive rises in unemployment. 

Remaining with the bad news, the ICAC released their cotton report for June. Some frightening statistics included an estimated fall in global cotton trade this year by 30%, textile and apparel imports in the US and Europe have fallen by 20% since January and many retailers are expecting a fall in sales of nearly 80% for 2020. The report took a global look at the effects of the pandemic and stated that 90% of the global workforce will have their jobs affected because of the virus. Growers, traders, spinners and retailers will all suffer from the pandemic.

There is still plenty of cotton at origins and in transshipment ports around the world looking for a home but without potential bidders. In attempt to relinquish stocks many merchants have been reducing the basis on Brazil cotton to levels not seen for many years. West African levels are weaker than before the pandemic but still fairly strong relative to other origins, the issue is finding a buyer with the capacity to pay the asking level. 

It is only US cotton that continues to find homes on a regular basis, and this is mostly to China and Vietnam. China is continuing to comply with the phase one trade deal and as long as that continues we should see December remain relatively neutral. Waiting at the door however is the CCI and their two million MT of stock lying in warehouses waiting for a further reduction in price, perhaps even this week. For now only small sales have been made to local mills, but with further reductions we could potentially see this cotton flood the market. 

It would take a brave person to go long in this market but perhaps even a braver person to take on a large short position. We are reminded of the ‘invisible hand’ theorised by Adam Smith. Going short and pushing the market lower from here would have dire consequences on the supply chain if prices are sent down to the 40 c/lb, as many analysts are predicting. Those contracts concluded and fixed by the already suffering mills would not be performed. The lower market would badly punish producers, many in developing countries. Demand would drop to even lower levels as mills would wait to buy, assuming that prices will be lower from one day to the next. 

This is of course a growing possibility in the cotton market as we wait for the day of red on our screens. For now, it is calm and the storm is being weathered, at least on New York, but what is waiting for us around the corner may have huge consequences.