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So far, 2012 has seen a better than expected chain of events than might have been expected at the end of 2011, as Euro zone fears have tempered slightly, there have been indications that China could be in the process of shifting away from a tightening stance, and US economic activity has continued to give off signs of forward progress. Certainly the floating of surging European debt will be a long, drawn out affair that could at any time serve to yank the rug out from under the markets, but so far the take-down of their debt has gone favorably. It is possible that the markets are starting to settle on the idea that Greece might be allowed to fail and in turn be forced from the EU. While that event will most certainly foster significant volatility, it could end up being the de facto end of the Euro crisis. On the other hand, with even a moderate improvement in macroeconomic conditions in the Euro zone, it could become increasingly more difficult to spark full-blown anxiety events, and that more than anything could speed the crisis toward a favorable outcome. Recent suggestions from the US Fed seem to indicate that the US will remain supportive of the global economy, even in the face of improvement in the job market and, more surprisingly, even in the face of an increase in near term inflationary pressures. In other words, some members of the US Fed are acknowledging the severity of the Euro zone crisis, and they are apparently willing to increase the risk of inflation pressures in the US in order to facilitate a return to global stability.

From a physical commodity market perspective, it might not take much forward movement in the global economy to see many commodity prices rally in 2012. We would suggest that commodity markets in general have already seen a healthy liquidation of speculative long positions (as can be seen in a chart of the composite non-commercial and nonreportable net long positions for non-financial commodities). Therefore, we think that the risk to longs in markets like silver, copper, platinum, rice, cocoa, natural gas, and soybean meal might be somewhat limited in the months ahead.

Traders should not underestimate how important China is to several physical commodity markets. In addition to their possible shift to an easier monetary policy stance, China will also have a noted impact on commodity markets that receive fresh demand from restocking efforts. Those include corn, soybeans, sugar, cotton, copper and pork. In the near term, the best leading indicator for many commodities might be the action in the Shanghai stock market, which appears to have managed a bottom with the action in early January. If the equity market action isn’t convincing enough to declare a turn up in the Chinese economy, one might simply look back to China’s four record monthly coal import readings over the last year as evidence that their economy has retained its capacity for forward motion.

So far, 2012 has seen a better than expected chain of events than might have been expected at the end of 2011, as Euro zone fears have tempered slightly, there have been indications that China could be in the process of shifting away from a tightening stance, and US economic activity has continued to give off signs of forward progress. Certainly the floating of surging European debt will be a long, drawn out affair that could at any time serve to yank the rug out from under the markets, but so far the take-down of their debt has gone favorably. It is possible that the markets are starting to settle on the idea that Greece might be allowed to fail and in turn be forced from the EU. While that event will most certainly foster significant volatility, it could end up being the de facto end of the Euro crisis. On the other hand, with even a moderate improvement in macroeconomic conditions in the Euro zone, it could become increasingly more difficult to spark full-blown anxiety events, and that more than anything could speed the crisis toward a favorable outcome. Recent suggestions from the US Fed seem to indicate that the US will remain supportive of the global economy, even in the face of improvement in the job market and, more surprisingly, even in the face of an increase in near term inflationary pressures. In other words, some members of the US Fed are acknowledging the severity of the Euro zone crisis, and they are apparently willing to increase the risk of inflation pressures in the US in order to facilitate a return to global stability.
From a physical commodity market perspective, it might not take much forward movement in the global economy to see many commodity prices rally in 2012. We would suggest that commodity markets in general have already seen a healthy liquidation of speculative long positions (as can be seen in a chart of the composite non-commercial and nonreportable net long positions for non-financial commodities). Therefore, we think that the risk to longs in markets like silver, copper, platinum, rice, cocoa, natural gas, and soybean meal might be somewhat limited in the months ahead.
Traders should not underestimate how important China is to several physical commodity markets. In addition to their possible shift to an easier monetary policy stance, China will also have a noted impact on commodity markets that receive fresh demand from restocking efforts. Those include corn, soybeans, sugar, cotton, copper and pork. In the near term, the best leading indicator for many commodities might be the action in the Shanghai stock market, which appears to have managed a bottom with the action in early January. If the equity market action isn’t convincing enough to declare a turn up in the Chinese economy, one might simply look back to China’s four record monthly coal import readings over the last year as evidence that their economy has retained its capacity for forward motion.

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The market has seen a very strong recovery bounce into the New Year and it may take a continued strong global economic view ahead in order to rationalize the recent strength. Exports have come in much better than expected in the past few months and there is also increased concern that producers in the US and China will back away from the market and plant less acres for the coming year just as global demand is improving. This would assume that emerging market growth continues on a firm pace and that the European debt situation does not slow global growth prospects. The International Cotton Advisory Committee indicates that China has acquired a total of near 2.1 million tonnes of cotton from producers to replace reserve stocks and also about 1 million tonnes of foreign cotton to add to reserves. Non-China cotton stocks are expected to increase by 26% this season to 8.7 million tonnes, the largest in four years. Global production for the 2011/12 season is expected to reach 26.8 million tonnes, up 8% from last year and that global demand is expected near 23.9 million tonnes, down 2% from last year. The market surged higher yesterday to close 4.4% higher on the day to push to the highest level since November 18th. Traders see short-term support from rebalancing efforts by index funds and from active “across the board” buying of commodity markets yesterday in anticipation of a stronger environment for commodities in 2012. Outside market forces were extremely supportive yesterday and look neutral for today. Global ending stocks look burdensome to start the 2012/13 season and this is expected to cap the market on corrective bounces. Cotton was the worst performing commodity market in 2011 dropping a whopping 36.6% for the year. The USDA attache in India revised their crop production forecast for the 2011/12 season down by 750,000 bales to 34.25 million bales. Commodity Index traders held a net long position of 51,276 contracts in the last COT report. For the two major index funds, traders believe that these funds will be buying near 11,000 contracts in the first week of the year. ICE certified deliverable stocks increased to 39,395 bales from 39,394 bales the previous session but from 49,998 bales last week.

TODAY’S GUIDANCE: Look for technical signs of a near-term top near key resistance for March cotton at the 95.78 to 97.80 zone with support back at 93.60 and 91.42. Index fund buyers may be more active this week before the buying slows.

TODAY’S MARKET IDEAS: Position traders might look to establish bearish put strategies for the first quarter and we would not rule out another leg down longer-term objective.

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SOYBEANS

The soybean market has seen a collapse of more than $3.00 since late August and is extremely oversold going into the key October USDA Crop Production and Supply Demand reports on Wednesday, October 12th. On top of the bearish macroeconomic news of the past six weeks, the market is also absorbing better weather for September and a general expectation for higher yields in the report. There have been recent indications that yield in areas which were hit with dryness could be down due to low moisture content. However, we still expect to see a jump in yield to around 42.8 bushels/acre, up 1 bushel/acre from last month. While the late start to corn plantings might have pushed actual soybean planted area a bit higher, the FSA data has indicated the opposite. We lowered our estimate of harvested acreage by 100,000 acres. With a record South America supply on September 1st, we also lowered our export forecast by 10 million bushels. As a result, we see ending stocks increasing to 233 million bushels from 165 projected last month. This would push the stocks/usage ratio to 7.4%, a 5-year high.

PRICE OUTLOOK: We see a bounce in January soybeans to the 1211 3/4 to 1266 3/4 zone as a selling opportunity, with 1145 and 1139 as next downside objectives.

CORN

There is also plenty of talk from the early harvest of higher than expected yield. While the weather in July was some of the worst on record, subsoil moisture ahead of the heat was good. Producers used record high profitability on paper to justify spending more on inputs (such as fertilizer) in order to attain optimal yields. On top of that, the weather in September was nearly ideal. We are looking for a jump in yield in this report to the vicinity of 150 bushels/acre, up from 148.1 last month. This would more than offset a drop the harvested acreage of 500,000 acres that we think resulted from the poor weather earlier in the growing season. Based on these changes, we are looking for production to come in around 12.585 billion bushels, which is still below projected usage. We have lowered our estimate of ethanol usage by 25 million bushels and have raised our exports estimate by 50 million bushels due to expected increases in demand from China. As a result, we see ending stocks increasing to 943 million bushels from 672 projected last month. This would push the stocks/usage ratio to 7.4%.

PRICE OUTLOOK: The increase in ending stocks is expected, and even if yield is left unchanged, ending stocks will increase to 858 million bushels (784 million with the acreage adjustment), so it will be tough to see a bullish surprise for the report. Our concern is that the soybean numbers could be negative enough to carry the other grains lower after the report. The long liquidation trend by hedge funds and index funds is a concern. Look for December corn resistance at the 630 to 651 zone, with support at the 575 to 551 zone.

WHEAT

The Quarterly Grain Stocks and Small Grains numbers (which included wheat production were released last week, so a good deal of the uncertainty in the wheat outlook has already been absorbed by the market. As a result, the “by class” estimates will be the most important data for the wheat market in Wednesday’s Supply/Demand report. Hard spring wheat ending stocks could slip below 100 million bushels, which would be the second tightest on record. (In 2007, record low stocks contributed to the rally to $24.00 per bushel.) While this could be the bullish highlight of the report, US total ending stocks and especially world ending stocks data are not showing any abnormal tightness. US ending stocks could drop to 725 million bushels from 761 million last month and 861 million last year. Production was already revised down by 69 million bushels last week.

PRICE OUTLOOK: With the extremely oversold condition, it will not take much in the way of positive news or even some relief from global economic concerns to spark at least a short-covering bounce in wheat. Dryness in Ukraine is still an issue, and there could also be a return to dry weather in the US southern plains that could spark concerns for next year’s supply. Given the huge profitability for corn and soybean producers around the world, the wheat market might also be caught up in a battle for planted acreage. Close-in support for December wheat is 610, with 642 and 676 1/2 as stiff resistance. The double bottom might spark some short-covering ahead, with funds holding a record high net long position.

COTTON

Traders see yields coming down for this report, which could drag production down by 150,000-250,000 bales. Pakistan’s production may also be revised lower. However, there are still concerns that other key exporters like India will be more competitive than the US, which could raise questions on the ability of the US to export 12 million bales this season. It is too early in the marketing year and the current export pace is too strong for us to expect the USDA to revise is US export estimate lower. With that in mind, the US ending stocks might come in at 3.2 to 3.3 million bales versus 3.4 million last month and 2.6 million last year. World demand is still in question as well, so lower US and Pakistan production estimates may not necessarily lower world ending stocks.

PRICE OUTLOOK: Look for a range of 106.80 to 94.55 for December cotton over the near term.

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There seem to be enough factors to provide solid support for the cotton market over the short term. Ideas that the USDA report next week will show a smaller US cotton crop, a more positive tilt to outside market forces, and concerns about too much rain falling on the soon-to-be-harvested Texas crop are all seen as positive forces. The technical action has also improved this week with the market rejecting the idea of moving to a lower price level and closing near the high end of the recent consolidation. A surge higher in Asia stock markets helped support a move to a new 10-session high for December cotton overnight, and this may attract additional buying support during the session today. Commercial buyers have been active on moves under 100 over the past week. Traders also see the possibility of a lower crop out of Pakistan as well as the US for the USDA report next week. Less anxiety regarding the global economy plus a turn down in the US dollar provided support to a wide range of commodity markets overnight. While several inches of rain may fall on the west Texas crop into the weekend, traders believe it will not be too harmful to the quality of the crop and that if the weather clears soon, the harvest can resume without much in the way of damage. The crop was just 16% harvested as of Sunday, compared to 13% last week and 23% last year.

TODAY’S GUIDANCE: The longer term demand factors are in question, but the market looks poised for a recovery bounce at least into the USDA report next week. Until there is more known about the size of the US crop, the market does not seem to want to move to a lower price level.

TODAY’S MARKET IDEAS: December cotton support comes in at 102.30 and 100.80, with resistance at 104.80 and 106.85.

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The weak technical action yesterday has left the cotton market vulnerable to increased speculative long liquidation selling today. Yesterday’s outside day down is seen as a negative technical development. Large and small speculators combined still held a net long position of 47,436 contracts as of September 6th. More cancellations in the weekly export sales report and weakness in the grain markets were seen as forces that drove the market sharply lower yesterday. Weekly export sales for cotton came in showing cancellations of 171,300 running bales for the current marketing year and net sales of 36,600 for the next marketing year for a total net cancellation of 134,700 bales. China was noted as canceling 200,000 bales. Cumulative cotton sales stand at 56.7% of the USDA forecast for 2011/12 (current) marketing year versus a 5 year average of 33.6%. Sales of 102,000 running bales are needed each week to reach the USDA forecast. Chinese futures were down 0.7% overnight, and the US market could attract more end-of-week selling today. A big crop in India will likely cause increased competition for exports this year, and the larger crop in China is expected to help limit the import demand. The market is technically overbought after the recent strong gains.

TODAY’S GUIDANCE: Selling resistance for December cotton comes in at 112.72 and 114.30, with 106.96 and 104.33 as initial support.

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The cotton market inched higher in quiet trade yesterday. Outside market forces were quite strong, but the market does not appear to be overly influenced by them at the present time. A more positive tilt for many commodity markets has been seen in recent days, with active buying by fund traders, but this does not appear to be the case for cotton. A surge higher in soybeans and the stock market didn’t provide much support either. Traders still see a smaller US crop than what was reported in last USDA report, but they also see struggling demand and a lack of interest in US cotton. Export sales started out on a strong pace this year, but the have been weakened by major cancellations in recent weeks. Indian textile industry officials believe their 2011/12 cotton crop could come in near 35.5 million bales, which would be a record high. Last year’s production totaled 32.5 million bales. India is expected to be a major exporter of at least 7 million bales this season. The surge in production stems from strong prices of the past year. The weekly Crop Progress report showed that 30% of the cotton crop was rated good/excellent as of Sunday, compared to 31% last week and 60% last year. The 10 year average for this time of year is 54%. This is still the worst-rated crop on record. The previous low was 34% in 1998. The Texas crop improved slightly to 14% good/excellent, up 1% from last week, while Georgia’s conditions fell 7% to just 26% good to excellent versus a 10-year average of 51%. The North Carolina crop is rated 44% good to excellent with 25% bolls opening. In South Carolina the report showed 29% bolls open as of Sunday. This may minimize the impact of heavy rains from the weekend storms, especially if we see sunny weather ahead.

TODAY’S GUIDANCE: The outside market forces are slightly negative today. December cotton will need a close above 106.22 in order for us to expect some further upside action. For now, the market is in a consolidation. Ideas of a poor US crop ahead of the September production update may help provide some underlying support.

TODAY’S MARKET IDEAS: December cotton support is at 102.97 and 101.10, with resistance at 106.22. A close through resistance would leaves 111.77 as an upside target.

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The charts have the appearance of a double bottom going into the key USDA production and supply/demand reports on Thursday morning. The cotton market closed sharply lower yesterday, following economic sensitive markets lower early in the day and then failing to follow the US stock market higher. Overnight, the market did recover all of the losses from yesterday, as it appeared to benefit from the late-day surge in the US stock market. Demand fears persist, as traders see US cotton having a tough time competing with India for the coming year. India has seen a large jump in planted area. Last month’s USDA world supply/demand report was especially negative, showing a significant drop in demand and rising ending stocks. The weekly Crop Progress Report this week showed a record low 30% of the US cotton crop rated good/excellent compared with 65% last year. Texas was rated just 12% good to excellent. While non-irrigated land will not be harvested, yields on irrigated land are expected to be small. For the US crop, production was revised down by 1 million bales last month to 16 million, and we would not be surprised to see a crop near 14.5-15.00 million this month. The USDA also revised exports down by 1 million last month to 12 million, and this could also come down this month by 300,000-500,000. As a result, US ending stocks could slip to 2.25-2.50 million bales from 3.0 million last month. Until there are signs of better demand, the market may struggle to find much traction on poor crop conditions in the US. India and China production numbers will be monitored closely. The most recent COT report showed that large and small specs combined still hold a net long position of 48,602 contracts as of last Tuesday, which left the market vulnerable to liquidation selling.

TODAY’S GUIDANCE: Chinese cotton futures were up nearly 1% overnight, and outside market forces look positive for commodity markets today, with a weak dollar and higher grain prices. December cotton failed to hold support this week and looks vulnerable to beginning another leg lower. Selling resistance today is at 99.41 and 101.17, with 87.30 as next downside target.

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In our last issue we predicted a further slowing of the US economy before a transition to a better 2nd half of 2011. However, the stalled US debt ceiling debate that was eventually pushed out to the brink of the August 2nd deadline has probably left US consumer and investor sentiment injured for most of August. Given the ongoing political divide, it is even possible that sentiment will continue to be affected well into September. In looking back at a chart of US Consumer Confidence, it is clear that it was dramatically undermined by the Japanese natural disaster. While we don’t think the US debt crisis created as much raw fear and anxiety, we do think it added to the softening of the US economy. We might also suggest that the divided political arena in the US could ultimately cause US consumer confidence fall more than it did from the Japanese earthquake.

In looking at the historic rally in gold, it is clear that the most recent wave of anxiety was indeed very significant. This is another indicator of the collateral damage done to the US economy. Furthermore, with independent and foreign-based entities advising the US of the need to reduce US spending by $4 trillion and the initial effort from Washington failing to meet even half of that goal, the ability to protect the US from a something similar to the sub-prime crisis has been dramatically reduced. In fact, with both sides of the political battle in the US upset with the debt ceiling extension plan and the anti-spenders promising to battle even more aggressively in the future, it is clear that a major portion of the US populace, government and media have yet to grasp the reality that US government spending is going to come down.

With US economic numbers softening, the US Fed thought to be on hold and the US government “probably” limited in its ability to offer stimulus programs through the end of the year, it could be very difficult to throw off a generally bearish macroeconomic track for the weeks ahead. Expectations of slack US data points have recently had little impact on members of the Fed, with some members steadfastly holding against additional quantitative easing efforts. Certainly the US economy could somehow gather itself and temper macroeconomic fears, but we think that is unlikely until the negative environment of July and early August works through the closely watched US numbers. About the only thing that could alter our negative 3-4 week economic outlook would be a surprise “grand deal” from the super committee, if it were to find the necessary spending cuts from programs that don’t have broad political support.

Therefore we expect to see weakness prevail in US equities, energy prices, sugar, platinum, copper, cocoa and other physical commodity markets that lack the internal fundamental fortitude necessary to stand up against a quasi-deflationary environment ahead. Some markets like corn and hogs appear to have the fundamentals to stand up to some outside market pressure, but it is also possible that weakness in the US Dollar will provide some underpin for physical commodities in the weeks ahead. While Euro zone debt fears have seemingly become entrenched, the capacity to cushion the dollar against its own problems is limited. Therefore, it is possible that further economic weakness in the US economy and the still unresolved nature of the US debt battle will likely leave the dollar in a downward track. Some traders even suggest that interest rate differentials between the US and the euro zone are such that the dollar will remain under pressure from that angle, and that in turn could serve to support certain physical commodity markets.

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With the bearish tilt to outside market forces this morning and more negative demand news out of China, the cotton market looks like it could remain in the current downtrend unless there is some type of surprise in the weekly export sales news this morning. China imported just 120,017 tonnes of cotton in June, down 32% from last year. Imports for the year have reached 1.326 million tonnes, down 14% from last year. Cotton futures in China were down 0.7% overnight, the US dollar was stronger, and energy markets were weak. The Texas crop continues to suffer from poor weather, and traders see little hope of any yield at all on non-irrigated land and poor yields on irrigated cotton fields surrounding Lubbock, Texas. The region might see some better chances of rain after another 7-8 days of 100 degree highs. There were 3 days this month with precipitation, but it was well under one tenth of an inch, and there was one day in June when 0.01 inches fell. Traders remain focused on US and European debt issues and a very sluggish demand outlook. Certified deliverable exchange stocks fell to 66,194 bales from 70,255 the previous session.

TODAY’S GUIDANCE: Traders will monitor the weekly export sales as the primary focus on the market now is just how low prices will need to go to stimulate demand. Futures are oversold technically but there is still no sign of a low.

TODAY’S MARKET IDEAS: December cotton resistance is at 100.75 and 102.65 with 94.46 and 91.55 as next downside targets.

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While there is a serious production issue developing for the Texas crop, cotton followed the grain markets and some of the other agricultural markets lower yesterday with a speculative long liquidation tone. China cotton futures followed New York lower overnight falling 1.8% for the active January contract. Economic concerns for the market continue to cast a negative demand tone. Old crop July cotton, on the other hand, is up sharply in overnight trade and has moved to as high as 166.20 from 144.10 on Monday morning. A short-covering squeeze ahead of first delivery day on Friday has helped support July futures. While the West Texas crop continues to suffer, rains have hit in eastern Texas and Louisiana to help improve crop conditions but the primary growing regions for Texas remain hot and dry with not much of a change in the forecast. For Lubbock Texas, there is no rain in the forecast with temperatures in the 100,s through next Thursday. The limit-down close for corn and a weak close for the US stock market plus further weakness overnight has helped to keep pressure on December cotton. Traders will monitor the weekly export sales report today for some clues on the short-term demand. A surge higher in the US dollar overnight adds to the negative demand tone. The market may be seeing increased production from other parts of the world but it will be difficult to see a decent US crop without better weather in Texas. The non-irrigated areas of West Texas have dried up and there will be little or no production from these areas without a shift in the weather.

TODAY’S GUIDANCE: The outlook for heat and a lack of rain for West Texas is a bullish force but the weak technical action for December cotton is a concern for the bulls and outside market forces remain bearish.

TODAY’S MARKET IDEAS: Buying support for December cotton comes in near 115.85 with 129.38 and 132.10 as next upside targets.

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