NY futures finally found support this week, as May rebounded 111 points to close at 75.62 cents.
Last Friday the May contract had fallen to an intra-day low of 73.38 and closed at 73.46 that day, which marked its lowest close since January 19. This was the first day of the GSCI roll, which brought on a lot of sell-side liquidity from spec longs exiting their positions. There were also some new short-sellers who added to the pressure.
But with the May/July spread closing at 201 points that day (= full carry) and the spot month trading below its “fair cash value”, it provided enough of an incentive for some traders to take a stance and either buy the spread or the market outright.
Over the following four index roll sessions from Monday to today the market not only withstood a further onslaught of heavy spec long liquidation, but it managed to claw its way back above the long-term uptrend line, ending the week on a nine-session high.
The latest CFTC report showed that speculators had reduced their net long position by 1.76 million bales to 9.63 million bales between March 29 and April 4, while the trade had cut its net short by 2.06 million bales to 16.18 million bales. Since then these net positions have dropped further due to all the liquidation during the index roll period. We therefore estimate that speculators are only around 6.5-7.0 million bales net long at this point, while the trade net short position is probably down to 13.2 to 13.7 million bales.
Thanks to speculators reducing their net long by some 5 million bales in a matter of four weeks, it has allowed the trade to reduce its unfixed on-call balance by a considerable amount. As of last Friday unfixed on-call sales on May and July amounted to 5.2 million bales combined and today this number is probably down to around 4.5 million bales. That compares to 8 million bales four weeks ago! However, even though a lot of progress has been made, 4.5 million is still a considerable amount, especially if speculators were to become less inclined to abandon their position.
US export sales once again surpassed expectation as 532,600 running bales of Upland and Pima were sold for both marketing years combined. Participation continued to be broad-based with 22 markets buying and 25 destinations receiving shipments of 458,200 running bales. Total commitments for the current season now amount to 13.9 million statistical bales (versus a revised USDA estimate of 14.0 million), whereof 9.5 million bales have already been exported. Meanwhile sales for August onwards have risen to 2.1 million statistical bales.
We are quite confident that last week’s export number will not be surpassed for quite some time, because the US is running out of cotton to sell. According to our calculation there are now only about 1.3 million statistical bales remaining for sales and that includes the certified stock of over 0.3 million bales.
We arrive at this number as follows: Beginning stocks of 3.8 million bales and a crop of 17.2 million bales give us a total supply of 21.0 million bales this season. From that domestic mills use 3.3 million bales and exports are so far at 13.9 million bales. This leaves 3.8 million bales, but we further need to deduct 0.9 million bales for domestic mill use from August to October and an estimated 1.6 million statistical bales (out of so far 2.1 million in ‘new crop’ commitments) for the same time frame. This leaves around 1.3 million statistical bales still available, which corresponds to about 6% of total supply.
So where do we go from here? Some traders wonder why the market has not reacted more positively to these excellent export reports in recent weeks. The answer is simple – it was massive spec long liquidation and new spec shorting that has kept a lid on the market. The heavy spec selling has diffused an otherwise explosive situation for now. However, in a sense it has made the situation worse, because thanks to a falling market US export sales have continued to increase at a mind-boggling pace. A few more weeks of 150-200k bales in sales and the US will for all practical purposes be sold out!
This recent selloff has also made traders complacent and this could come back to haunt them. There are still around 4.5 million bales to fix on July over the next two months and who knows whether specs longs will continue to provide sell-side liquidity. In fact, if the market starts to rally, specs may jump back onto the long side and fuel the flames. They have a lot more room to do so now!
We therefore see very limited downside for May and July. The 73-74 cents level has proven to provide plenty of support all the way back to the December and March contracts. With almost no cotton left for sale, this support level looks even more solid now!
The upside is a different story! If speculators continue to liquidate their net long, then the market may simply churn in the mid-70s for the next two months. However, there is a good chance that the specs stop selling and in fact go longer again, in which case a move above 80 cents is not out of the question.
New crop continues looks more bearish due to higher acreage and potentially favourable weather conditions with El Niño making another appearance. Rallies towards 75 cents in March should therefore be used to put on some bearish hedging strategies. Avoid December for new crop hedging!
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