Morning Futures Roundup

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Cotton Surplus Expected This Year Unless Mother Nature Has Other Ideas

 Fundamentals

The 2011/2012 crop year is supposed to see global Cotton production finally surpassing consumption levels for the first time in many years, as record high cash prices encouraged increased Cotton planting -- especially in Asia. The USDA is estimating that world production will rise to 125 million bales, which if true could be a record. This increase is desperately needed to keep up with rising demand, with the USDA forecasting global consumption to rise to 119.5 million bales.

In the US, Cotton plantings are expected to rise by about 15% to 12.6 million acres, with a projected harvest of 18 million bales this season. However, the current estimates are assuming ideal growing conditions in the key Cotton production areas, and so far this year this has not been the case. Extreme drought conditions are plaguing southwest Texas, with the 6 to 10 day forecast calling for only a slight chance of precipitation in the region. The lack of rainfall and extreme heat is leading some traders to look for the USDA to lower its estimate for the size of the US Cotton crop in its June Crop report due out on Thursday morning.

High cash prices have started to crimp demand lately, as buyers looking for potentially large supplies of Cotton reaching the market later this year are holding back on purchases and keeping current inventories lean. This has kept old-crop Cotton prices in check, but the weather concerns have put new-crop December futures within striking distance of contract highs. Though the possibilities of a global Cotton surplus remain in traders' minds, it would only take a continued "weather scare" to keep prices volatile going into the harvest this fall.



 Technical Notes

Looking at the daily chart for December Cotton, we notice what might be the formation of a head and shoulders pattern. This "reversal" pattern, if valid, would portend that the April 6th highs (top of the head formation) should not be taken out. The theory holds that if prices fall below the "neckline" (currently near the 113.00 level) we should see an acceleration of the downward move. However, prices are still trading well above the "neckline", and in fact, are still holding above the 20-day moving average. Momentum as measured by the 14-day RSI has moved to a neutral stance, with a current reading of 51.37. Near-term resistance is seen at the June 2rd highs of 140.90, with near-term support found at the 20-day moving average currently near the 127.00 area.


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