Ouch! Another day of big losses.

We warned of a “bear flag” formation last week, projecting to the 79 area in December futures. And when that contract probed below key chart support at 82 (the September lows) this week, it was as if the hangman pulled the lever and the floor dropped. In two days futures lost as much as theyΆd lost during the preceding month. Several developments were responsible:

First, resumption of weekly harvest progress and condition reports on Monday showed harvest at only 21%, down from the 36% 5-year average, and yet mill demand sluggish. More importantly, condition ratings on the unharvested crop came in at 44% good to excellent, up from the last report prior to the government shutdown and the same as last year, when the U.S. average yield was 887 lbs. per acre vs. USDAΆs current forecast for 796 lbs/acre this year. A consensus developed that USDA will hike U.S. yield, production and ending stocks significantly in the next WASDE report, Nov. 8th.

Second, supplies of deliverable cotton stocks began to grow rapidly, spooking speculative longs out of positions by dashing any ideas long hedgers might spook a short-covering rally by demanding delivery. And finally, resumption of export sales reports Thursday offered more bad news. Sales year-to-date have fallen even further behind where they need to be to sustain USDAΆs current forecast for 13.9 million bales in 2013/14 exports. In fact, that gap is now out to 1.25 million bales, based on five years of history, and nearly assures USDA will cut its export forecast in the Nov. 8th WASDE update in addition to hiking the production estimate.

WeΆre not advising any new crop sales yet, however, because we already expected cotton acreage to decline a bit in 2014 before this weekΆs break. If this level of weakness persists, acreage could drop significantly. And while ChinaΆs reserve policy is still a major wild card, thereΆs no clear evidence yet that theyΆre planning to put those reserves on the market.