Dec 13 plunged from a high of 93.54 on Aug 19 to a low of 82.43 on Aug 30 (today), eroding (but not eliminating) the Dec 13 – Mar 14 inversion as it went, until it finally showed some signs of life today by rebounding 211 points off its low to finally settle 25 points in positive territory.

This evening, many technicians will write many articles about this being a key reversal day. And, that may well be right. For producersΆ sake we hope thatΆs true and that Dec 13 looks northward to these gaps, which more often than not are filled, as a target for a rally.

We suspect that Dec 13Άs continued decline this week was attributed to continued fund liquidation and technical selling, the latter of which no doubt had stop loss orders hit during Friday morningΆs furious rally.

Last week we expressed our thoughts on the fate of Dec 13 for the week ending Aug 30 – flat to slightly higher. I suppose that we could say that we were basically correct, depending on oneΆs interpretation of “flat” (Dec 13 finished 59 points off on the week). Looking forward to the short trading week ahead, there will be many items for traders to consider in determining their actions.

On Tuesday USDA-NASS will issue its weekly crop progress report, which has seen improvement for the past two weeks. However, it is questionable that, with the return of hot, dry weather to W Texas, TuesdayΆs report will offer much hope for a larger crop than the currently estimated (USDA-NASS) 13M bale crop.

On this same note, last weekΆs crop condition index was exactly the same as it was during the last week of July when NASS conducted its first objective yield survey of this season from whence the 13M bale production estimate was produced.

More information on the general condition of Texas cotton can be gotten from crop insurance data via USDA-RMA. The data is largely complete, but not officially so; even so the new Texas cotton crop currently has a loss ratio of 1.02. That is, to date, insurers and reinsurers have paid out indemnities totaling 102% of premiums received.

With as much Texas acreage currently listed in the “poor” to “very poor” categories, one can only imagine that this ratio will climb higher, and, as it does, the total 2013 Texas production estimate should decline. We will consider this factor somewhat bullish.

A second concern is that, with the release of some positive US economic data this week, the US dollar has strengthened, which is not generally good for wither cotton export sales or futures prices in general. When considering this in combination with the continuation of weakness in both the Brazilian Real and the Indian Rupee (both nations are major cotton exporters) we would have to consider this factor as somewhat bearish.

During this time of the year, as cotton harvesting across the northern hemisphere is either occurring or about to commence, the issue of seasonality comes into play. This is normally a negative factor for futures prices, but the bulk of this yearΆs US harvest will start, and probably finish, significantly later than normal.

Considering that stocks of old crop US cotton are tight and that certificated stocks have been drawn down to approximately 21K, we would say that seasonality for the coming week is neutral and that the latter two items constitute a somewhat bullish scenario. This is lent credence via the continued inversion of the Dec 13 – Mar 14 spread.

Like all USDA reports for the coming week, the weekly export report will be released one day later than normal. We have found no solace in the last two reports not only because of the lackluster net sales numbers, but also because of the number of cancellations reported and the destinations to where sales were largely committed.

The report released on Aug29 contained a net sales figure of approximately 79K RBs (upland and ELS-type), which was far less than reported industry expectations, and cancellations in excess of 50K RBs, most of which were attributable to China and Japan.

For the second week running Turkey was responsible for the lionΆs share of new sales while the bulk of the remainder of sales were credited to Latin American entities (basically a US-Brazil captive market). We think we need to see sales increase in E Asia to begin to feel better about our export prospects.

And, we also think this is likely to happen as we suspect that a number sales made during the first two days of Dec 13Άs close near the 84.00 level were not included on the last report. Also, with the recent decline of Dec 13 prices we should see fewer cancellations.

The Cotton-on-Call report (CFTC) will provide further insight to recent sales activity as well. Generally, we think this will be somewhat bullish for the coming week.

Another indicator that is still on the fringe, but that we are certain managed money funds, as well as everyone else, are keeping a watchful eye on is the situation in Syria. Russia and China (both permanent UN Security Council members) have expressed their displeasure with even the notion of a military strike against Syria by the US.

Any national action that draws the displeasure and ire of our largest cotton export customer will be anything but bullish. Again, this is currently on the fringe, but it could possibly influence hedge and index funds from taking or beefing-up long positions in the cotton market. We will consider this, for now, a dab bearish.

There are other factors to consider as well, we know, and they will all play out in the coming week. Somewhat discounting the current Syrian situation, presently we will call for Dec 13 to have a slight improvement by next FridayΆs settlement.

Louis W. Rose IV, PhD, MBA, grew up on a cotton farm in northeast Arkansas and has been involved in cotton his entire life – starting in his familyΆs fields, then as an Extension scout while attending the University of Arkansas and later as a crop consultant, operating his own firm before transitioning into a career as an agricultural analyst in 2000. He is a former Global Cotton Analyst with Cargill Cotton where he developed predictive statistical models for the firm. Rose currently provides analytical services. Contact: info@rosereport.com.