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The story for the week in cotton seems to be the failure to break. Instances of light fund selling and evening up ahead of the USDA’s reports by other spec traders did not reveal any technical cracks in the cotton market. The sharp rally in the dollar on December 4th also failed to generate any panic selling. If the cotton market were a major bank, we could call these recent events a series of ’stress tests’ like the ones that the US Treasury and Fed put US banks through earlier this year, and the cotton market appears to have passed all of its tests. On the fundamental side, cotton got support yesterday from the Export Sales report and trade data as well as the US and world supply/demand reports. The USDA’s supply/demand report showed a small increase of 90,000 bales in US production to 12.59 million bales. However, exports were raised from to 11.0 million bales from 10.5 million in November which resulted in a drop in ending stocks to 4.5 million running bales from 4.9 million in November. On the world supply/demand report, the bullish numbers started with beginning stocks which were dropped by nearly 1 million bales. World domestic use was raised by about 1 million bales and exports were raised by 730,000 bales. This resulted in a drop in projected world ending stocks of about 2 million bales to 51.81 million bales versus 53.72 million in November. This week’s export sales were above the high end of trade expectations at 268,300 running bales, all for the current marketing year. As of December 3, cumulative cotton sales stand at 47.5% of the USDA forecast for 2009/2010 versus a 5 year average of 53.1%. While the cumulative total is still running behind Sales need to average 155,000 running bales each week to reach the USDA forecast. The US Balance of Trade report also showed general increases for both imports and exports of textile/cotton cloth categories in October versus September. Stocks registered for delivery against the ICE No. 2 contract declined to 464,790 running bales today from the previous total of 465,371 bales.
TODAY’S GUIDANCE: Funds are a major factor in all markets, and recent price action in a number of commodity markets have raised the possibility in some traders’ minds that funds could be in the mood to trim their long positions in the markets in general. This has been keyed in part to a stabilization and modest rally in the dollar. However, some markets such as natural gas are still seeing an infusion of capital during this apparent transition phase which suggests that funds are not in the process of a general withdrawal of capital. Cotton is also more dependent on the near term economic outlook which, for now, appears to be improving. There are tiers of support in the March cotton contract starting at 73.50, then at 73.00 and then in the 72.00 to 72.50 area. First resistance is near 75.03 to 75.09.
TODAY’S MARKET IDEAS: A steady to stronger dollar could limit gains to that level for now, but a break in the dollar could push the March contract to near 78.00.
