The Hightower Report

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Commodity markets in general are showing a positive tilt overnight but sugar is not. The reversal from a six-month peak along with ideas that congestion is easing at Brazil ports helped to pressure. In addition, cooler and rainy weather is moving into the Russia and Ukraine producing areas which is seen as a negative development. October sugar closed lower on the session yesterday after trading at the highest level since March 1st. Trade remained choppy in New York while London played catch up with Tuesday’s late run in sugar. Traders await official monthly production updates from Brazil for release today but there is some expectations that dry weather in Brazil this harvest season could cause yields to begin to decline for the tail end of the crop and that there may be revisions lower from previous expectations. The International Sugar Organization sees a world production surplus of 3.22 million tonnes for the 2010/11 season as compared with a deficit of 4.95 million tonnes last year. Rains in Russia this week may not reverse losses expected after severe drought conditions in August but at least this may be seen as a reason to suspect that the production potential may at least stabilize. Traders had been expecting record sugar production of near 4 million tonnes before the drought but the Russia Sugar Producers Union has lowered their estimate to 3.2-3.3 million tonnes and some private forecasts have dipped as low as 2.8 million tonnes. India weather remains favorable for a large crop.

TODAY’S GUIDANCE: The reversal from six month highs may be seen as a negative technical development and some rains in Russia and talk of easing congestion in Brazil may be factor to encourage speculators to liquidate part of their large net long position. Resistance for October sugar comes in at 2016 with 19.28 and 18.94 as initial support.

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The market is in a steep downtrend and in a transition year with growing expectations that supply will be higher than demand for the coming year. However, the sharp losses of the past few weeks have left futures oversold technically and a turn back down in the US dollar overnight may help spark a corrective bounce. December cocoa continued to extend its decline yesterday with fairly sharp losses, reaching its lowest price levels since July of 2009. Widespread forecasts for a global surplus during the upcoming crop year are beginning to have a negative impact on the cocoa market, as this would be a change from the deficits of recent years. Recent rains in the Ivory Coast have improved the prospects for this season’s cocoa crop. A mild rebound in the British Pound was able to provide a small amount of support to the cocoa market. A wet and sometimes cooler pattern in the Ivory Coast in the forecast into next week is not what the crop needs to mature ahead of harvest in the fall. Sun and less rain will help the crop mature and will help the crop avoid black pod disease. For now, conditions look favorable to see a large Ivory Coast crop and this could help boost estimates for a world production surplus. Surplus estimates are seen near 75,000-100,000 tonnes for the coming year and these likely assume steady growth in demand. Given the historically high prices of the past year and a weakening European and US economy, demand may not be as high as expected. There were 22 deliveries posted against the September contract bringing total deliveries so far to 609. ICE cocoa warehouse stocks were down 21,210 bags to 3.567 million bags.

TODAY’S GUIDANCE: The downside break-out leaves 2682 and then 2495 as longer-term downside objectives. Selling resistance emerges at 2810 and 2829 for December Cocoa.

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The market saw a significant long liquidation break from Monday’s highs and fell as much as 12.3% in just three trading sessions. This leaves the market in an oversold technical condition but the follow-through selling certainty confirms that a major top is in place. Weakness in the US dollar and ideas that roasters may emerge to provide some support could spark a corrective bounce today. Open interest has been declining since mid-July as short-covering was the foundation for the last leg higher to 12 1/2 year highs and open interest declined sharply in the past few sessions which could be an indication that speculators are liquidating longs. The small and large trader combined net long position reached nearly 50,000 contracts in the last COT report which is considered overbought and a general sense that the world and US economies may weaken along with the recent uptrend in the US dollar has fund traders second guessing the “buy and hold” commodity play which has been a popular theme in recent months. December coffee was unable to recover from Tuesday’s huge losses, and extended the sell-off even further to the downside during the session yesterday. At this point, the market has moved over 18 cents lower in just three sessions. A 30% production increase over last year’s levels from a major coffee growing state in Colombia, in spite of disease outbreaks, had led some to lift overall projections for Colombia coffee production this season. Carryover coffee stocks in Vietnam for the upcoming crop year are expected to be larger than last season’s levels, in spite of heavy exports during July. Vietnam officials are still expected to move ahead on their stockpiling plan in which up to 500,000 tonnes (or near 50% of this season’s production) would be held off of the market for up to six months to support producer prices. The coffee market faces a significant (7-8 million bag) world production surplus this season which should help alleviate tightness in the cash market. ICE exchange stocks were down 5,867 bags yesterday to 2.022 million with 27,179 bags pending review.

TODAY’S GUIDANCE: Look for selling resistance to emerge near 174.20 and 176.90 for December coffee with 161.10 as next downside objective.

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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 remains in a tight consolidation near the low end of a 5-month trading range and seems to have the supply fundamentals to move to another lower price level ahead. December cocoa continues to have difficulty with mounting a recovery from this month’s heavy sell off, as prices ended the day with a minor loss. Farmers from the Ivory Coast are projecting this season’s cocoa production will show a large increase over last year. Even the late season production may see a minor jump in production as some of the new crop may be ready early. The shift to a world production surplus for the coming season after a few tight years is likely to keep the price trend down unless there are developments in outside markets or the supply disappoints. For now, however, the market is pricing in a large main crop harvest which normally begins in September. Tightening exchange stocks continue to provide some support. While this season’s cocoa production from Cameroon will have nearly a 4% decline from last year, there are expectations that this shortfall will be fully recovered by the end of next season’s crop year. Yesterday was the first notice day for the September cocoa contract at the ICE with deliveries of 513 contracts posted. Arrivals for the week ending Sunday from the Ivory Coast increased to 9,000 tonnes from 2,022 tonnes for the same week last year. ICE cocoa warehouse stocks came in at 3.685 million bags, down 9,391 bags on the day.

TODAY’S GUIDANCE: While the market is attempting to form a base of support near the 2860-2850 level, the declining open interest during the consolidation phases is not a good sign for the bulls with speculators still holding a net long position in the last COT report. The market is in a short-term oversold condition so we can not rule out a recovery bounce but the pattern is typically considered a continuation of trend pattern and we would keep 2828 and maybe 2682 as downside objectives for December cocoa. Resistance is 2917 and 2979.

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There is still no technical sign of a top and the market continues to find support from declining exchange stocks but the fundamentals seem to be slowly shifting to the bear camp. Open interest has been declining since mid-July as short-covering may have been the foundation for part of the recent move to new 12 1/2 year highs. After reaching highs earlier in the week, December coffee could not sustain upside momentum and lost ground for the second day in a row yesterday. This upcoming season’s coffee production from El Salvador will be over 43% above last season’s levels. Recent rains in growing areas of Vietnam may improve expectations for this season’s coffee crop. Forecasts for Brazilian production areas call for temperatures to remain well above levels that could cause a damaging frost. Daily exchange stocks fell to another 10-year low yesterday, down 1,600 bags to 2.044 million bags with 21,389 bags pending review. The market is in a transition period going from extremely tight supply of higher quality coffee and a relatively tight supply of all coffee on July 1st to a much easier supply period ahead. World production is expected near 133-135 million bags for the 2010/2011 season which is up from 120 million this past season with a bumper crop from Brazil as the key reason for the supply increase. Exports in July from Central America, Mexico, Colombia, Peru and the Dominican Republic totaled 1.976 million bags, down 7.6% from last year. This pushed October to July cumulative exports to 20.048 million bags, down 10.8% from the previous season.

TODAY’S GUIDANCE: While stocks are tight at the beginning of the 2010/11 season, the bumper crop out of Brazil and the increasing production out of Colombia should eventually bring an expanding supply of deliverable grade coffee on the world market. Short-term support comes in at 176.50 and 174.50 with 187.45 as next chart count “if” the uptrend continues.

TODAY’S MARKET IDEAS: Watch for a sign of a top soon and a move through support could spark an increase in speculative long liquidation selling. If the market turns down from here, 169.75 will be initial strong support.

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If outside markets were to signal some short-term weakness in commodity markets, sugar looks vulnerable to a significant downside correction as speculators continue to hold a massive net long. Keep in mind, the large and small specs combined held a net long position of 148,950 contracts in the last COT report which is a historically high level and last years high prices might translate into higher world production ahead. In fact, even last year’s major world importer, India, is exporting white sugar on the world market for the first time in two years. India is offering sugar on the market at $90 premium to the London white futures market which is well below Thailand offers near $200 premium. Thailand offers hit a peak near $250 premium in July. Traders see India production near 25 million tonnes this season from 18.8 million this past season and compared with consumption which is thought to be near 23 million tonnes. Recently, however, there is talk that India production could be even higher with trade house rumors this week indicating that key producing regions in India saw a jump of up to 35% in planted area. October sugar closed moderately higher on the session yesterday and near the highs of a 64 point trading range. Futures were sharply lower early in the day under pressure from weak commodity and energy markets and choppy trade in the US dollar. The market is continuing to find supply concerns out of Europe and Eastern Europe/FSU beet growing regions and from ideas that import demand will increase in this region and from Pakistan import demand as well. There is also increased talk, however, that India will be supplying white sugar to Pakistan this year. Talk of the potential oversupply from India and Brazil helped to pressure the market early.

TODAY’S GUIDANCE: While the market has inched back up to near the early August highs, the supply fundamentals seem to be shifting more toward the bear camp as tightness in India supply has shifted to the country moving to an exporter for the first time in a few years. The market is also in a very overbought condition when looking at the spec net long position and if India production is higher than expected, fund and speculative longs might begin to search for other markets to “buy and hold”. Resistance for October sugar comes in at 19.60 and a move back under 19.18 might be considered a negative technical development. Key support is back at 18.22 and then 17.15.

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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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Fund buying across the spectrum of agricultural commodity markets yesterday and continued trade house buying in London helped keep the market in a well defined uptrend channel. The market continues to find support from tightening exchange stocks and a perceived tight supply situation in Europe. Ideas that the European economy is doing much better than expected along with bull spreading and a widening inversion in London is also helping to support. End user buyers remain on edge as deliverable stocks are tight and a large London trade house took a large portion of deliverable supply off of the market with the July expiration. Cocoa supply should be on the rise in the months ahead but near-term supply is tight and quality of the mid-crop out of Ivory Coast remains an issue. The main crop harvest does not start until October. Traders see a slight world production surplus for the 2010/2011 season but the focus of attention into the fall could be the size of the Ivory Coast crop. Many traders see the crop near 3.75 million tonnes from 3.518 million last year. Brazil arrivals remain behind last year’s pace but some traders see supply on the rise. September cocoa was able to post a sizable gain for the session yesterday but finished well below the highs as a sharp mid-session rally was quickly reversed. Cocoa’s strength was sustained throughout the session, in spite of a turnaround in the British Pound. Cocoa exports from the Indonesian island of Sulawesi during July were up nearly 50% from last season’s totals. However, cocoa exports from Cameroon this season are running over 4% below last year at this time. ICE cocoa warehouse stocks were down 55,790 bags to 3.819 million bags.

TODAY’S GUIDANCE: Commercial traders are meeting with London exchange representatives to discuss the deliveries situation in July and there is continued talk of position limits to discourage speculation. This may end up having some influence ahead. A continued tightening of exchange stocks in the US and a pick-up in fund buying activity continue to provide underlying support. The close above $3092 (now close-in support) has improved the technical picture and opens the door for another test of the July highs. Resistance is now at $3180 and $3228.

TODAY’S MARKET IDEAS: It will likely take a turn down in outside market forces or a shift to increasing exchange stocks to turn the minor trend down.

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The market managed to hold key support on the break Tuesday and while there appears to be a significant top in place, it will be important for the bears to see this support (165.65 September coffee) to be taken out soon. If not, the reversal top and set-back on Tuesday will just look like a correction in the bull trend. September coffee regained upside momentum and moved well away from the recent lows yesterday but prices remain far below Monday’s 12 1/2 year highs. Tight near-term supplies of Colombian coffee have underpinned the market’s recovery, as they point towards the historically low levels for certified deliverable stocks at both the ICE and the LIFFE exchanges. Weather forecasts for Brazilian production areas remain too warm to cause any frost damage and the crop is more than 50% harvested. One of the primary reasons for the surge higher into the August 2nd peak was declining exchange stocks and this is still a potentially supportive force as higher quality deliverable coffee is still in tight supply and in many cases such as Colombia is still priced above the board. A major coffee retailer in the United States raised list prices for several of their brands by an average of 9% and this is higher than normal push in prices and could slow demand but commercial retailers are just adjusting to the higher world price. ICE certified Arabica coffee stocks fell by 1,029 bags to 2.079 million, with 15,879 bags pending review.

TODAY’S GUIDANCE: September coffee resistance comes in at 173.30 and 175.25 with support at 165.65. A decisive move under support will turn the trend down and leave 156.55 and 150.65 as downside objectives.

TODAY’S MARKET IDEAS: We have a slight bearish bias but outside market forces remain strong and exchange stocks are tightening.