By Dr. O.A. Cleveland

Special for Bayer CropScience

Commodities continued under pressure for the second consecutive week and the December ICE contract fell dangerously close to its long time and very important support level near 111.00 cents. Demand continues as the sticking point as mill yarn inventory has not been worked sufficiently lower to merit increased buying. Export cancellations continue, but last weekΆs report also indicated very excellent sales for 2011/12. The U.S. crop has gotten smaller, mainly due to Texas and the Southwest, but other global crops are improved over the previous week.

USDAΆs July supply/demand report will be released Tuesday, July 12, and will show a decline in the U.S. crop, primarily associated with the Southwest. However, as it should, the USDA report will be conservative. Analysts and merchants already carry a smaller crop size than is expected in the report. Failure to hold the 111.00 level would likely generate increase scaled down mill buying that would be expected to stall the price downtrend.

However, the 111.00 support level is very critical. The 4-week and 13-week lows are both 112.26 and offer support. The 50-percent retracement point from the 52-week high is 107.89. Failure to hold that price level portends trading down to 99.00 or 100.00 cents, the 38-percent retracement point from the 52-week low.

While improving world crop conditions have somewhat offset the effects of the 200-year drought in Texas, some analysts have dropped their estimate of the Texas crop to 2.7 million bales. While that may be far too low for most to stomach, estimates of 3.5 to 4.0 million bales are common. Too, if rain were to begin now, the crop could climb as high as 5 million bales, assuming good cotton weather for the remainder of the growing season. My guess is that the USDA estimate will be 4.8 to 5.0 million bales. It is likely that 3.0 to 4.0 million acres will, in the final analysis, be abandoned. The final U.S. crop size will likely be between 14.5 and 15.0 million bales. Look for USDA to lower its estimate of the 2011 crop from 17.0 million bales to between 15.75 and 16.5 million.

Domestic consumption for the current season, 2010/11, will likely be reduced from 3.8 to 3.6 million bales. Exports could be lowered 250,000 bales to 14.75 million. These changes would cause ending stocks to move higher, jumping to as high as 2.75 million bales.

The market is telling us that it will not let carryover fall lower than 2.5 million bales. That is, the higher prices seen earlier this year cut off demand and now the current price downturn is attempting to uncover demand to keep the market at 111.00 and above. Accepting that assumption and that of a 15-million bale crop suggests that 2011/12 domestic consumption will be about 3.5 million bales and exports will be about 12.50 to 12.75 million bales. Thus, should USDA place the crop above 15.0 million bales, and then look for its estimate of exports to be larger. That is, the agency would likely leave its export estimate unchanged at 13.0 million bales.

For growers that have not done any pricing, the time to act is now. I would price a full 25 percent of my expected production at the current market price (about 112 to +113 ) A move above 118.00 would prepare me to price another 25 percent on any approach near 125.00. A close above 125.00 will beg for trading above 130.00.