2010: A softs year – But have the trends come to an end?

The legacy report shows commercials went from 49,331 net short to 47,564 net short in cotton.

In coffee the commercials went from 45,661 net short to 35,871 net short, and in sugar we saw the commercials going from 195,931 net short to 174,349 net short. Looking at the charts below, you will see I use the newer Disaggregated COT report. It is far superior for seeing the “big money” movement in the markets.

Commercial Net Tracker instructions
This form tracks the Commitment of Traders (COT) data for the commodity futures market. This form "looks" at the most recent five weeks of COT data and provides visual indications of the data. A. If the current value is at a 12-month low, the cell will display a red/burgundy background. B. If the current value is at a 12-month high, the cell will display a green background. C. If the current value went from net negative to net positive, the cell will display a blue background (indicating a bullish condition). D. If the current value is both a 12-month high and also went from a net negative to a net positive, the background will be green. You should view the data with green backgrounds to determine if they also went from net negative to net positive.

Proceed to Page 3 for this week's detailed fundementals charts...

Dec cotton prices fell to a two-week low as they sagged from their recent record high of $1.5723 a pound, the highest price since cotton began recorded trading 140 years ago. Bearish factors include:

1. The action by India’s CA to hike its estimate for India’s cotton crop for the year that began Oct. 1 to 35.7 mln bales from a September forecast of 34.45 mln bales.

2. Speculation that China’s actions to curb inflation will reduce its demand for commodities.

3. An early U.S. cotton harvest with 78% of the crop harvested as of Nov. 14, 14 pts ahead of the five-year average of 64%.

Bullish factors include:

1. USDA’s Nov. 9 cut in its global cotton output estimate for this year to 115.25 mln bales from October’s 116.68 mln bales and the cut in its global carry-over estimate to a 15-year low of 42.2 mln bales.

2. Unrelenting Chinese demand after September Chinese cotton imports surged +96.6% y/y to 200,800 metric tons. Weekly U.S. cotton exports (week ended Nov. 11) were 142,000 running bales; cumulative 2010/11 (August-July) exports down –4% y/y.

Fundamental Outlook – Bull market correction – Cotton prices are correcting lower from their parabolic rise on shrinking global supplies and unrelenting Chinese demand. The USDA cut its global carry-over estimate to a 15-year low of 42.2 mln bales, which may shrink even further if Chinese demand continues at its current torrid pace.

Dec coffee prices retreated from their recent 13-year nearest-futures high. Bearish factors include:

1. Dollar strength that prompted fund liquidation of many commodities.

2. ICO’s report that September global coffee exports rose +13% y/y to 7.98 mln bags.

Bullish factors include:

1. USDA’s cut in its Brazil coffee production estimate for the year starting July 1 to 54.5 mln bags from a May estimate of 55.3 mln bags.

2. Tight supplies as NYBOT-monitored coffee stockpiles have declined for 24 straight months to a 10-1/2 year low of 1.78 mln bags.

3. The prediction from Brazil’s Coffee Council that their coffee output next year may drop to 36 mln bags, the lowest in 4 years after a drought hindered flowering of coffee trees.

Fundamental Outlook – Bull market correction – Coffee prices corrected lower from their recent 13-year high on long liquidation pressures. Coffee fundamentals remain bullish due to tight supplies and strong demand. Coffee production in 2009/10 fell -5.9% y/y to 120.6 mln bags (ICO), but production should rebound to 133-135 mln bags in 2010/11 (ICO). Brazil’s 2010/11 (July-June) production will rise 23% y/y to 55.3 mln bags on their favorable two-year cycle (USDA).

March sugar prices corrected down to a five-week low from their recent 29-year high on long liquidation pressure. Bearish factors include:

1. China’s sale of 200,000 MT tons of sugar from its reserves to curb prices.

2. The EU’s hike in sugar exports by 350,000 MT in the year ending September and its elimination of import duties on raw sugar.

3. Overall fund liquidation of commodities on dollar strength and concern that commodity demand will weaken on China’s actions to curb rising prices.

Bullish factors include:

1. ISO’s cut in its 2010/11 global sugar surplus estimate to 1.3 MMT from last month’s estimate of 2.0 MMT.

2. USDA’s Nov. 9 hike in its U.S. sugar import estimate for this year to 2.74 MT, up +21% from an October estimate.

3. ISO’s forecast for a 1.7% increase in global sugar demand this year that will cut the inventory- to-consumption ratio to a 20-year low of 32%.

Fundamental Outlook – Bull Market Correction – Sugar prices are correcting lower after the sharp seven-month rally, although fundamentals remain bullish on supply concerns and as India may limit sugar exports. ISO is forecasting a small 1.3 MMT global sugar surplus for 2010/11 after two years of deficits. The USDA is forecasting a sharp 5.5% rise in 2010/11 global sugar production versus a +2.6% y/y in consumption.