Market Comments – November 10, 2016

NY futures moved higher this week, as December gained 113 points to close at 69.20 cents.
 
The market continued to meander in a tight range this week and neither the surprising Trump victory nor the WASDE report provided an incentive for the market to leave its sideways range. In fact the range has gotten even tighter, with December closing its last 9 sessions between 68.07 and 69.20 cents!
 
The WASDE report turned out to be another non-event, as only minor changes were made to the US and global balance sheets. Starting with the US, the crop was raised by 130,000 bales to 16.16 million bales, which came as the result of a larger crop in Texas (+400,000 bales) and a reduction in the Southeast (-310,000 bales), whereas the rest of the cotton belt saw only minor changes.
 
We believe that the Texas crop still has room to grow, possibly by another 0.4 to 0.5 million bales. Although the USDA raised the yield in Texas from 589 to 625 lbs, which projects a crop of 6.9 million bales, local sources tell us that both the irrigated and dryland crops in West Texas are the best in years. We therefore expect to see the final yield closer to 660 pounds, which on 5.3 million harvested acres would produce a crop of 7.3 million bales.
 
The Mid-South has further upside potential as well, probably another 100,000 to 150,000 bales. We therefore see the final US production number at around 16.7 million bales.
 
Turning to global numbers, the USDA increased production by 0.59 million to 103.28 million bales, which was mainly the result of increases in India (+0.50 million) and the US (+0.13 million). Global mill use was basically left unchanged at 111.99 million bales, which means that the annual production deficit is expected to shrink to 8.71 million bales.
 
Since there was also an upward revision in beginning stocks of 0.36 million bales, mainly stemming from increases in Tajikistan and Turkmenistan, global ending stocks rose 0.96 million bales to 88.31 million bales. The entire increase occurred in the ROW, where stocks are now projected at a more comfortable 40.21 million bales, which would be 1.5 million bales more than last season.
 
However, as we have pointed out before, the USDA has once again failed to address the stock situation on the Indian subcontinent, where beginning stocks will sooner or later have to be adjusted lower in order to reflect reality. We feel that stocks in India and Pakistan are around 3.5-4.0 million bales overstated, which would render ROW stocks a lot tighter.
 
The Trump victory has led to some interesting moves in the financial markets. While stock markets initially sold off when Trump emerged on top, with Dow Jones futures down as much as 800 points on election night, they have quickly recovered, with the US stock market closing at an all-time high today!
 
While stocks have rallied since the elections, US bonds have been selling off sharply, meaning that interest rates are on the rise. The 10-year treasury closed today at a yield of 2.14%, up 0.29% in just two days! Traders fear that the Trump stimulus plan – lower taxes and massive infrastructure spending – and protectionism will lead to higher inflation. If true, then this inflation tide will eventually lift all the boats, commodities included!
 
US export sales for the week that ended on November 3rd were about as expected at 197,400 running bales for Upland and Pima combined, with 18 markets buying and 22 destinations receiving shipments of 151,100 running bales. Total commitments for the current season are now at 6.55 million statistical bales, of which 2.4 million have so far been exported. The next export sales report is likely to show a significant increase owing to the business concluded during the US Sourcing Summit that was held in California earlier this week.
 
So where do we go from here? The market has been moving sideways for about 3 months now, but in doing so it has been forming a ‘flag’ with higher lows and lower highs, from which it will eventually break out. The current boundaries of this flag formation are roughly 68 and 71 cents. A move below or above these levels would likely trigger a reaction by speculators.
 
From a fundamental point of view there is still plenty of grower selling above 70 cents, especially with the US crop turning out bigger, while mill fixations below 68 cents should provide a lot of support. The latest on-call report showed a small reduction as we head into the final days of December, but as of last Friday there were still 1.6 million bales in unfixed on-call sales on December, while the overall total amounted to 8.6 million bales.
 
Once the December fixations are out of the way we might see a small dip in prices as we head into the holiday season, but with most spec longs likely to hang around given the outlook for higher inflation, we feel that any such dip will be readily absorbed by mill buying/fixations. We therefore don’t expect a major move to either side, but rather a somewhat expanded trading range of perhaps 65-72 cents. 

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