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NY futures closes once again mixed this week
May '11
NY futures closed once again mixed this week, but this time it was July that dropped 462 points to close at 151.03 cents, while December rallied 838 points to close at 127.57 cents.

After the July/Dec inversion grew from less than 21 cents to over 38 cents a week ago, it has once again started to come in, closing at less than 24 cents. Although the unwinding of a massive 10 million bales spread position belonging to large speculators may have been the driving force in the July/Dec spread lately, fundamentals are confirming the narrowing of the spread.

It seems as if we were dealing with two different markets at the moment! On the one hand there is current crop, which feels heavy, with delays, cancellations and high-priced inventories weighing on it. On the other hand there is new crop, which is getting a lot of support due to the uncertainty in some key growing areas after a less than ideal start.

The bearish US export sales report seemed to take the wind out of the bulls' sails, as cancellations of 62'300 running bales more than offset new sales of 29'300 bales for current crop and 21'800 bales for next marketing year. Shipments of 285'700 running bales were slower than usual as well and it will be interesting to see how many of the outstanding 3.1 million bales in commitments will ultimately be exported by the end of July.

De-certifications, which managed to scare some July shorts into covering last week, only showed up in small numbers this week. This leaves the certified stock at around 188'000 bales for now, with some 5'000 bales 'under review'. At this point it is anybody's guess what the owner of the certified stock is going to do with it. Some say that it will be shipped against existing commitments, while others feel that will be put against the July contract. Based on how sluggish the physical market feels at the moment, the second option seems to make more sense to us.

West Texas continues to wait for rain and most of the area is now classified as being in 'extreme drought' after seven months of hardly any precipitation. Lubbock has received just 1.1 inches of rain since the beginning of the year, which compares to a normal reading of 5.03 inches and last year's abundant rainfall of 11.50 inches at this date. To make matters worse, the average temperature in April was 5 degrees Fahrenheit above normal in Lubbock, which combined with high winds has dried out the soil two to three feet deep. According to the National Weather Service the current drought ranks near the worst in the region's history.

However, there is still hope as the forecast calls for a change in the weather pattern this weekend, with the dryline starting to move west towards the New Mexico border. This should allow some moisture to infiltrate the area, which is expected to lead to thunderstorm activity between Sunday and Tuesday. It wouldn't be the first time that the West Texas crop gets a lifesaving rain on Memorial Day, which is probably why the market has shown only a muted reaction to this potential problem so far. It will be interesting to see where things are when trading resumes on Tuesday. If it rains, the market will definitely breathe a sigh of relief and retreat somewhat, and if it doesn't we may see a rather swift move to the upside.

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