NY futures collapsed further this week, as December fell another 906 points to close at 104.46 cents. The market's freefall accelerated this week, after the important 113 cents support level in December was breached on Monday. There are still too many unwanted long positions chasing after a limited number of buyers and as long as this situation continues, the market won't have any sustainable support.

There was a glimmer of hope that buyers might finally be back after some non-US business was concluded to China on Wednesday, but we suspect that it was mainly of opportunistic nature, with a few local traders taking advantage of attractive (compared to domestic prices) high grade offers for nearby shipment in order to fill in some gaps.

Today's US export sales report showed an all too familiar picture, as new sales of 41'300 running bales were once again more than offset by cancellations of 132'500 running bales, resulting in yet another net reduction of 91'200 running bales for the current marketing year. In the last 16 reports since March 24, there has only been one week that showed a net increase in sales, with the cumulative net reduction amounting to 744'200 running bales.

Fortunately, the situation looks a lot better for the 2011/12 marketing year, which begins in a little more than two weeks from now. Last week new sales increased by 43'600 running bales net and the 16-week total shows a net gain of 1'572'200 running bales. In other words, if we look at sales of both crop years combined, US commitments have still grown by 828'000 running bales since this string of cancellations began at the end of March.

If we look at the total amount of outstanding export commitments for both marketing years, we currently have 7.7 million statistical bales of Upland and Pima cotton on the books, which compares to 5.85 million statistical bales a year ago. Considering that the US crop is probably going to be around 2.0 - 2.5 million bales smaller, the statistical situation in the US looks quite a bit tighter than a year ago.

However, this may not matter much to the market, because according to the latest USDA report, total foreign production is expected to increase by 10.7 million bales year-on-year, from 96.45 million bales to a record 107.16 million bales. If we add to this number the 7.7 million bales that the rest-of-the-world has already purchased from the US, it adds up to more than enough supplies to cover foreign mill use, which the USDA currently pegs at 112.95 million bales. Therefore, the fact that the US struggles with its crop may not be a major factor, at least not until later in the season.

While the pendulum in the cotton market is swinging from exuberance to extreme pessimism, we need to keep a watchful eye on macroeconomic events and outside markets. Although a bearish case for cotton can certainly be made based on the improving balance sheet, we need to remember that the cotton market does not exist in a vacuum. Yesterday the Fed Chairman started to prepare the financial world for yet another infusion of liquidity in order to keep the credit bubble from imploding. Today Mr. Bernanke tempered his statement by saying that the Fed may not take any immediate action to stimulate the economy. The sobering reality is that the Fed no longer has control over the economy and that it can merely try to manage expectations at this point.