NY futures continued to lose ground this week, as May dropped another 113 points to close at 76.14 cents.
The May contract broke below a 4-week support level yesterday and market action remains negative, as some spec longs are apparently cashing in their chips. However, the long-term uptrend dating back to late February 2016 is still in force, which means that for now we need to treat this weakness as a correction in a bull market and not as a trend reversal just yet.
May open interest has started to decline due to spec long liquidation and trade short covering, dropping from 15.4 to 14.1 million bales over the last five sessions. Nevertheless, this is still the highest open interest ever at this date! Since some May contracts were apparently rolled down the calendar, total open interest held up quite well as it dropped by only 0.2 million to 28.0 million bales. This is still not far below the all-time record of 30.27 million bales set in March 2008!
The CFTC Commitment of traders report had spec longs at 11.46 million net long as of March 21, down 0.59 million bales from the week before. The trade managed to reduce its net short position by 0.53 million to 18.51 million bales. Both of these positions have come down further this week, but they still remain large by historical standards.
The on-call report showed that mills made some progress with their fixations last week, as they reduced unfixed on-call sales in May by 0.55 million bales to 2.78 million bales, while July saw its number go up by 0.10 million to 4.46 million bales. There were some additional fixations done this week and we estimate that the combined amount for May and July has now fallen below 7 million bales, which is still a record number for this point in time.
Overall unfixed on-call sales have declined by only 0.1 million bales to 11.83 million bales last week, as buyers added 0.35 million bales to December and later fixation periods, which now amount to 4.6 million bales. With US and global production expected to rise next season, mills are obviously convinced that their strategy is going to work out better next time around.
Today we got another excellent export sales report of nearly half a million bales, but as usual the market just shrugged. Total sales of Upland and Pima combined amounted to 487,600 running bales, with 22 markets buying and 24 destinations receiving shipments of 402,100 running bales. Total commitments for the season now amount to 13.2 million statistical bales (=100% of USDA export estimate), of which 8.5 million bales have so far been exported. Sales for August onwards currently amount to 1.8 million statistical bales.
Over the last ten weeks the US sold a total of 4.9 million running bales of Upland and Pima, yet remarkably the market has gone up just 300 points during that period. With only about 2.0 million bales left for sale one would expect prices to go higher in order to ration demand, but the market doesn’t seem to care and is actually lowering prices, as if it wanted to make sure that the balance gets sold as quickly as possible.
Maybe tomorrow’s USDA Planting Intentions report will inject some new life into the market, although most traders expect a bearish number of close to 12 million acres. However, we need to consider that we may not get another near-perfect season with low abandonment and good yields. If the strange weather we had over the past few months is any guidance it could turn into a challenging growing season, especially with so much of the production located in Texas.
So where do we go from here? US prices remain competitive and both sellers (no carry with an inverted July/Dec spread) and buyers (attractive basis, high quality and the desire to keep spinning US cotton) have an incentive to keep sales going. As mentioned before, with less than 10% of total US supply still available, one would expect some rationing to take place, but this is one of the most uncharacteristic seasons we can remember.
Although mills have made some progress with their fixations lately, a lot remains to be done over the next 2-1/2 months. We sense complacency among shorts because some spec longs have thrown in the towel lately, but given the large positions that remain this market is still dangerous and able to turn on a dime.
While we lean bearish in our longer-term view due to increased global production next season and potential headwinds on the macroeconomic front, this view doesn’t necessarily apply to May and July since they are in a game of their own. We still feel that being short current crop futures bears more risk than opportunity at current levels and would therefore advise to get out of harms way as soon as possible!
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