The Hightower Report

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The market signaled earlier this week that there were not enough sellers available to turn the trend lower. The question now becomes whether there are enough fresh buyers to take out the early August highs and resume the longer term uptrend. Over the short term, that may not be possible due to the overall negative tone in commodity and equity markets and some indications of an improved world supply situation ahead. But over the intermediate to longer term, a move to near 90.57 in the December contract is within reach based on continued export demand. An industry association in Australia, Cotton Australia, projected today that this year’s 2010/11 cotton crop will be up 70% from last year to 2.7 million bales with an official from that organization saying that a push over 3 million bales is possible. (It is now late winter in Australia.) In addition, India stands ready to more than compensate for lost production in neighboring Pakistan by sharply increasing its own cotton exports this year. The UN Foreign Agriculture Organization estimates that 3.2 million hectares of cropland were damaged in Pakistan during the recent flooding with the hardest hit crop likely to be rice. Cotton losses have still not been determined, but it seems likely that they will fall well short of the 2.0 million bales that some were projecting 1-2 weeks ago. Today’s Export Sales report will be a short term indicator of the urgency of world demand at current price levels. Traders are expecting sales to be at least 100,000 bales below last week’s strong total of 447,400 bales but sales are expected to remain well above the average of 168,000 bales that are needed each week to reach the USDA’s current export forecast for the 2010/11 crop marketing year. In yesterday’s action, December cotton took out the previous day’s high for the third day in a row. This came despite more weak economic news with new home sales falling to their lowest level since records have been kept and orders for durable goods rose by less than expected. Cooler and dry weather is expected in major growing areas of the south for the remainder of the week. In fact, below normal temperatures are expected in most of Texas, the Delta and the Deep South today with well below normal temperatures possible in the Texas Panhandle and northern Delta. Stocks registered for delivery against the ICE contract remained unchanged yesterday at 18,783 bales.

TODAY’S GUIDANCE: The market may key off export sales and the dollar into the end of the week. A strong total of 300,000 bales or more on today’s weekly report could push the December contract to a temporary new high. However, a total of 200-250,000 would tend to reinforce the status quo and a much weaker number might bring a test of the 83.50 level. First support in the December cotton contract remains near 84.09 to 84.14 with next support at 83.55. First resistance remains at 85.71.

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The market may continue to run out of sellers on breaks as we approach harvest and crop conditions remain under mild, ongoing pressure. This is true because a substantial percentage of the crop may already be hedged and importers keep buying despite higher prices. Temperatures remain warm across major growing regions of the southern US. Scattered areas of over 100 degrees should remain in Texas today with a larger area of 100s starting to reform there by tomorrow and expanding into southern Oklahoma. Scattered showers and thunderstorms are expected from Texas to the Southeast, although they will not be a major factor outside the Delta, Mississippi and Alabama. Rains may persist up to 5 days in the SE, but all of this should come with continued above normal temperatures that may last through the end of next week. The USDA will issue its latest Export Sales report this morning and traders are expecting a figure below last week’s strong total of 341,800 bales. However, the total is expected to be above the average of 163,600 bales that is needed each week to reach the USDA’s current export forecast for 2010/11. The pace of exports so far stands at a brisk 39.8% of the USDA’s projection versus the 5-year average of 21.8%. In yesterday’s action, December cotton sold off to start the day session and remained moderately lower for the rest of the day. Private crop forecasters in China indicated yesterday that the important cotton producing province of Xinjiang in NW China should produce a bumper crop this year, although one that may be delayed by about two weeks. This follows Tuesday’s reports from India that they may increase cotton exports by as much as 5 million bales from previous expectations of 3 million. Stocks registered for delivery against the ICE contract remained unchanged for the second day in a row yesterday at 19,394 bales. Open interest in cotton continues to rise, up by another 1,976 contracts on Tuesday to its highest level since September, 2008.

TODAY’S GUIDANCE: The dual rise of open interest and prices just ahead of a big harvest would be troubling in most years, but the very strong pace of export demand is the reason for the rally in the first place and recent Export Sales reports have indicated that buyers are not afraid to keep booking as prices go up. India’s increased exports could also put a damper on the market, but they may not export as much as 8 million bales when all is said and done, especially if inflation accelerates in the domestic apparel market. The expansion of middle classes in Asia translates into increased demand for clothing, and this will likely occur at much the same rate in Asia whether China’s economy expands at an 8% or an 11% rate over the coming year. First support in the December contract is above 81.78. First significant resistance is at 85.71.

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December cotton ticked through its June highs yesterday to trade at the highest level since late September, 2008. The market then sold off into mid morning before ending the day lower. This makes cotton one of a number of commodity markets that have made a significant new high and then closed lower over the past week, and it sets the stage for a modest retracement or pause in the rally in coming days. However, losses should be limited in cotton due to continued stressful weather in the south and southwest. A number of other factors could also easily arise to support the market on a pullback. These include: a lower dollar, a strong export sales number this morning, positive news on today’s Initial Jobless Claims report and Friday’s Unemployment report and the continued slide in stocks registered for delivery against the ICE futures contract. Traders are looking for an export sales total this morning somewhat in excess of the average needed each week to meet the USDA’s export projection for 2010/11. That average currently stands at 182,300 bales. Two private jobs numbers came in better than expected yesterday and that may cause some analysts to make positive adjustments to their forecasts for Friday’s big Unemployment report. The area of super hot air in the US is being pushed south and west today with 100s expected in central and eastern Texas (with the exception of the Gulf Coast), northern Louisiana, the southern two thirds of Arkansas and western Tennessee. The 100 degree patch is expected to mainly pull back into Texas tomorrow. Stocks registered for delivery against the ICE contract fell to a new low for the decade yesterday at 41,478 bales from the previous day’s total of 44,145 bales.

TODAY’S GUIDANCE: There are a number of factors that may support further new highs in coming days despite yesterday’s retreat from a new high for the move.  First support in the December contract remains near 78.00 and then at 77.45 to 77.50. First resistance is at the new high of 79.95 with next resistance near 80.75.

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The market may be nervous about the recent 2 1/2 cent advance in the December contract given the shaky economic outlook, particularly the outlook for consumer spending. However, a lower dollar, higher equities and a positive chart pattern helped to boost cotton again yesterday, pushing the December contract through its 100-day moving average. December cotton then ticked through yesterday’s high overnight, but the market quickly retreated due to a lack of support from outside markets. This week’s Crop Progress report showed the overall cotton crop rated at 68% good-to-excellent, unchanged from last week. However, there was a 1% shift from good up to excellent. Squaring stands at 94% versus the 5-year average of 87%, and 58% of the crop is setting bolls versus the 5-year average of 48%. Temperatures are expected to cool in parts of the south today with much of Texas and Louisiana only in the 80s. Areas to the east are expected to remain in the 90s with parts of Georgia in the upper 90s. The hot air mass is expected to become more predominant again tomorrow, although south central Texas and parts of the Texas Panhandle may still be in the 80s. Scattered showers and a few localized thunderstorms are expected today from central and East Texas on through the Delta and into Mississippi and Alabama, with more general coverage possible in the Delta. More showers are expected over the course of the week. New Home Sales were up substantially in June after posting an unprecedented drop in May. While the June total was higher than expected, it was still the second lowest monthly total in data going back to 1963, so this still does not bode well for job creation and consumer demand. Weather in India and Pakistan has improved since the weekend and into the start of this week with good rains in western growing areas in India and scattered thunderstorms in Pakistan. More showers are expected. Stocks registered for delivery against the ICE contract fell sharply again yesterday despite their already low levels. Stocks fell to 53,403 bales from the previous total of 55,389 bales.

TODAY’S GUIDANCE: While the cotton market may have further upside potential, there is little reason to expect a sharp uncorrected rally of the sort that we have seen this month in wheat. That is because cotton is still relatively close to its recent highs, and trend-following funds have been long in cotton this year, instead of short as has been the case in wheat. The great question in the cotton market is whether the growing US new crop supply can be counterbalanced by continued growth in demand from Asia. Over the short term, the December contract may fluctuate near the 100-day moving average under the influence of dollar direction. We continue to look for a move to near 77.48 over the short term. First support in the December contract is at 75.34 to 75.38 with next support at 74.65 to 74.71. Next resistance is at 77.48.

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The December contract pushed below last week’s lows overnight to its lowest level since March 3rd. While the new lows were minor, today’s day session may bring a test of whether investors are poised to continue selling. The Commitments of Traders report on Friday showed that trend-following funds continued to be net sellers as they gradually whittle down what had been one of the larger net long positions in any agricultural market. This comes as the USDA’s Crop Progress report showed continued improvement in the overall condition of the cotton crop through this past Sunday. The overall good-to-excellent rating rose to 67% on yesterday’s report. This is up 2% from the previous week and up 5% from two weeks ago. The 10-year average good-to-excellent rating is 53%. Squaring is at 79%, and 26% of the crop is setting bolls. Hot and humid weather and rains on the periphery of tropical storms have left the crop well watered from the Texas Panhandle through the Southeast with the exception of some scattered moisture deficits in central Texas, northern Mississippi and Alabama, and in parts of the Carolinas. Texas stands at 71% good-to-excellent. Drier conditions are expected today and tomorrow with the exception of some scattered light showers in parts of the Delta and points east. Forecasts call for hotter temperatures as the week wears on with the possibility of well above normal temps in Texas and the Delta starting next week. Economic numbers out this week include the US Trade Balance today, Retail Sales tomorrow, and some manufacturing data on Thursday along with the regular weekly Export Sales and Jobless Claims reports. Recent data have pointed to slowing on many fronts and this is raising concerns about the pace of consumer demand in the US through the end of the year. Stocks registered for delivery against the ICE contract fell again yesterday to 217,358 bales from the previous day’s total of 229,859 bales.

TODAY’S GUIDANCE: The overnight erosion suggests that the downtrend is resuming based on an improving crop outlook in the US and potentially sluggish consumer demand. However, it remains to be seen if there are enough sellers in the market at this level to generate sustained losses over the short term. It may take stepped up hedging pressure to fuel the downtrend and to spark further selling by investors, and both of these segments of the market could back off from selling if the market turns higher based on outside indicators. Increased export sales this week could also shift sentiment to the positive side, although the past two weeks’ totals were already above the average needed each week to reach the USDA’s export projection for 2010/11. First support is near 73.00 in the December contract. First resistance is at 74.09 and then at 75.25 to 75.27.

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The December contract fell to within one cent of its 100-day moving average yesterday, and this may be signaling that it is decision time for the cotton market. If the trend is going to turn lower, we are likely to see an acceleration to the downside by today or tomorrow. Otherwise, this is simply a test of support that will soon be followed by a resumption of the uptrend. The USDA will release its Planted Acreage report this morning, and it is expected to show an increase of near 350,000 acres from the 10.51 million projected on the March Planting Intentions report. Yesterday’s weak action in most commodity markets came on fears of a slowing of the economic recovery which could cause a ballooning in supplies of various commodities in late 2010 and into 2011. Cotton may stand out from this group in that it represents a market where stocks are expected to remain relatively tight into the end of the 2010/11 crop marketing year. While demand numbers could sag if there is a serious slowdown, middle classes in Asia are likely to continue growing, and that means increased world demand for basic consumer goods such as clothing, bedding and furniture. Yesterday’s negative economic news included an economic indicator in China that projected slower growth. This was followed by a sharp drop in the Conference Board’s index of consumer confidence in the US. That index fell to 52.9 in June from 62.7 in May. Weather forecasts through the end of the week continue to call for mostly light showers and some thunderstorms along the Gulf coast from Texas through Florida and into the SE along with hot temperatures. Heavier rainfall is expected right near the Gulf shoreline. There were no deliveries against the July futures contract for the second day in a row today. Total deliveries for the period so far stand at 985 contracts. Stocks registered for delivery against the ICE contract fell at a faster rate yesterday to 426,342 bales from the previous day’s total of 462,436 bales.

TODAY’S GUIDANCE: The eroding trading range of the past two weeks has taken the December cotton contract back near the middle of the broader range that was established from late April into early June. A push below 77.48 today could generate additional selling and a break below yesterday’s low at 77.04 would likely add to downside momentum. For now, we think near term support will hold, but it would be a good idea to be prepared for more selling. First support in the December contract is at 77.48 and then at 77.04. Resistance is at 79.07 to 77.20.

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Sellers have been scarce since late last week despite the fact that cotton has been in correction mode over that stretch. The lack of selling has been a factor despite weak jobs and housing data in the US and even signs of softening in the manufacturing sector with last week’s regional survey from the Philadelphia Fed. Yesterday’s Existing Home Sales for May were unexpectedly weak, showing a decline in sales for the month. This will be followed by New Home Sales this morning and Cotton Consumption, Export Sales and Initial Jobless Claims tomorrow. Traders are braced for more weak data on housing and jobs, but cotton demand numbers are expected to remain strong. Weather remains hot and mostly dry with only scattered light showers forecast over the next few days, mostly in and around the Delta. The early-planted crop started off with some of the best soil moisture levels in years, but late-planted cotton had more normal soil moisture, and some areas of the Delta and scattered areas of Texas could now use some rain. However, Monday’s Crop Progress report continued to show a high good-to-excellent rating of 62% for the overall crop, unchanged from the previous week. In yesterday’s action, December cotton saw another day with early weakness followed by a modest mid session recovery. Gains were limited and the day’s prices fell inside Monday’s range yesterday, but Monday’s highs were taken out overnight. Stocks registered for delivery against the ICE contract followed Monday’s very sharp drop with a more moderate drop to 529,352 bales from the previous day’s total of 568,792 bales.

TODAY’S GUIDANCE: The correction may be nearing an end in cotton. Demand numbers for cotton remain among the strongest for any agricultural market, and funds have maintained a large net long position in this market for that reason. There is actually room for trend-following funds to increase their net long position after a recent spate of liquidation and this, plus strong export sales, should push the December contract to new highs for the year of 83.50 and possibly 85.00 over the intermediate term. First support in December is at 78.93 to 78.95 and then at 78.00 to 78.24. First resistance is at 79.90 and then at 80.90.

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The market staged a massive short-covering rally this week that may in fact be a resumption of the longer term up trend. Leadership initially came from the nearby July contract, but the December contract briefly took over leadership late in yesterday’s session. The rally has been demand-led over the past year and the bullish demand outlook was bolstered yesterday by both the Supply/Demand and Export Sales reports. Yesterday’s supply and demand report lowered ending stocks for cotton for both the 2009/10 and 2010/11 crop years. The 2009/10 stocks were lowered to 2.9 million bales from 3.1 million last month. The 2010 stocks were lowered to 2.8 million from 3.0 million last month. This was due to an increase in exports for the current crop marketing year, 2009/10, which results in lower beginning stocks for 2010/11. Export sales were very strong this week with net sales for 2009/10 coming in at a very strong 624,200 bales and net sales for 2010/11 coming in at 198,700. This takes the cumulative total sales for the current marketing year to 107.1% of the USDA’s export projection versus the 5-year average of 102.4%. For the new crop, cumulative sales stand at 13.1% of the USDA forecast for 2010/2011 versus a 5 year average of 6.9%. Sales need to average 178,000 running bales each week to reach the USDA’s new crop forecast. The broad and long term nature of this demand suggests that it is based on continued expansion of the middle class in Asia. Recent evidence that wages are on an upswing for factory workers in China simply adds to the long term demand potential. The expansion in the US remains much more tenuous. Initial Jobless Claims dropped slightly to 453,000 this week, but this was slightly higher than expectations and it suggests that net job creation in the private sector remains limited. In yesterday’s action, the sharp rally in the overall cotton market and in the July/December cotton spread carried over into the start of the day, but the December contract closed the gap with July into early afternoon. Stocks registered for delivery against the ICE contract continued to plummet yesterday, hitting 795,994 bales versus the previous day’s total of 876,343 bales.

TODAY’S GUIDANCE: While the December contract initially lagged on this week’s rally, it may now be the leader. It rallied within two ticks of the late May high yesterday and looks poised to test the 83.50 to 84.00 level over the longer term. The sharp drop in stocks registered for delivery is a reflection of the strong pace of demand, and Chinese growth numbers suggest that we could see an acceleration of global demand in 2010/11. Over the shorter term, the December contract could set back into the 77.50 to 78.00 area before taking out the May high. First support in the December contract is at 78.15 to 78.25 and then near 77.50. First resistance is at 79.20.

A bumper grain harvest is making its way to market. Terry Roggensack, founding principal, The Hightower Report tells BNN the road ahead may be rocky.

http://watch.bnn.ca/market-morning/june-2010/market-morning-june-8-2010/#clip311022

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