The crises are following one another and are causing a disruption of all financial markets and cotton is no exception to the crisis which is taking hold on a long-term basis against a backdrop of inflation.
The decline in cotton prices cannot be understood without comparing it to the global macro-economic situation, which is seeing a massive tightening of credit under the impetus of the central banks (FED and ECB). Indeed, in its desire to limit inflation, the FED has massively and rapidly raised its key rates, putting many banks at odds. After the American and Swiss banks, it is now the turn of the German banks to suffer the wrath of the market. Despite the soothing speeches, it is likely that all banks, already weakened before the rise in interest rates, will have a hard time in the weeks to come, regardless of their nationality. The Basel 3 standards limit excessive leverage by imposing prudential ratios, without however guaranteeing against a large-scale systemic risk.
The looming credit crunch has raised fears of difficulties in the real estate market, but the uninterrupted rise in this sector since 2008 leaves room for a measured decline.
In a market where production costs continue to rise and planted areas continue to decline, particularly in the USA where there is talk of a drop of almost 20% compared to last year, how can we explain the downward movement of cotton on the ICE? The first explanation that jumps out is the decision of funds to sell the market short.
However, we must face the facts: demand is strongly penalized by the decline in purchasing power and the gloomy economic outlook, but also by global warming:
- - Rainfall conditions are deteriorating and it no longer rains where it should when it is necessary.
- - The prospect of El Nino is frightening and the disaster in Mississippi is causing fears of major disruptions.
- - The use of water reserves for agriculture will become a major issue. When you count 7 to 10'000 liters of water for a simple pair of denim pants, you are legitimately concerned.
Today, we will have to go back to the basics of our business so that production is concentrated on the processing areas while controlling irrigation or concentrating on rainfed farming. Some initiatives are emerging to replace the organic sector which is marking time. “Regenerative" cotton is the order of the day: a better supervised production with fewer inputs and sold at a higher price.
A more expensive raw material, higher production costs for clothes that are replaced less frequently. As virtuous as this may seem, we should not exclude from the spectrum certain countries such as Bangladesh, which imports 2 million tons of cotton per year without producing any and which will soon see its customs advantages disappear for exports, particularly to the United States. A lack of support would have dramatic consequences on these countries and part of the textile industry.
In this delicate climate for the financial markets, the new "misadventure" of the LME on the Nickel contract raises questions about the fragility of certain commodity futures markets.Πηγή: Mambo