NY futures rebounded slightly this week, as December gained 60 points to close at 67.24 cents.
December finally stopped the bleeding and moved sideways over the last five sessions, as speculators took a break from their relentless selling. Volume was lackluster this week and December open interest hardly changed since last Thursday.
The CFTC Commitment of Traders report confirmed that it was spec long liquidation and new spec shorting that had put pressure on the market during the week of June 14-20. Speculators sold 2.7 million bales net that week, reducing their net long to just 4.36 million bales. That position has been cut further over the seven sessions since then and is probably at around 3.5-3.7 million bales by now.
This would mean that speculators reduced their net long to about a third of the record 12.4 million bales they owned back in February. The good news is that specs won’t be able to sell at this pace for much longer, although they could go net short like they did in February 2016, when they had a record net short position of over four million bales. But it should be a more difficult grind lower from here considering that the supply pipeline will be completely empty at the end of the third quarter.
US export sales were once again excellent last week, as 584,200 running bales of Upland and Pima were sold, of which 262,300 bales were for June/July shipment. China and Vietnam continued to lead a field of 20 markets, while shipments of 261,100 running bales went to 26 destinations. Commitments for the current season have now reached 15.5 million statistical bales, of which 13.3 million bales have already been exported. Sales for August onwards are at 4.4 million bales so far.
Therefore, assuming a final export number of 14.7 million bales in 2016/17, there will already be 5.1 million bales in export commitments on the books on August 1st, plus whatever is sold between now and the end of July. In addition to that there will be 3.3 million bales that domestic mills take up next season. We therefore figure that around 9.5 million bales will have a home when the new marketing year begins.
The market didn’t react to these stellar sales figures and instead worried about tomorrow’s “Planted Acreage” report. Planting intentions were at 12.23 million acres three months ago, but we have a feeling that tomorrow’s number could be closer to 13 million acres, which would be bearish. Cotton prices were quite high during the planting window and this may have encouraged some additional acres to go into cotton.
The July notice period shaped up exactly as expected, with most of the certified cotton staying with its current owners, while about 25% will be changing hands. So far about 115,000 bales have been tendered, presumably all by Glencore, with Allenberg receiving the majority of it. We have already seen de-certifications of around 175k and given steep inversion of nearly 700 points it seems to be a foregone conclusion that the remaining cert stock of around 312k is already sold and will also be gone in a couple of month from now.
So where do we go from here? The market seems to be stuck between a bullish current crop and a potentially bearish new crop scenario.
Demand has clearly been stronger than anticipated this season, which has led to a rapid depletion of inventories around the globe (with the exception of Chinese Reserve stocks), to the point that origins like the US and India will basically be out of cotton by the time new crop is harvested.
However, the market is not too worried about these depleting stocks, since there is the promise of bigger crops all around the globe in the coming season, which should ensure ample supply.
What’s difficult for the market in regards to pricing is that empty pipelines are a reality, while these supposedly big crops have yet to be produced. The market reflects this “bird in hand is worth two in the bush” scenario through an inversion all the way out to March.
We believe that the market underestimates how difficult the transition to new crop could get in view of all these early commitments that shippers need to cover. This is the case whether the crop ultimately amounts to 18 or 20 million bales and for this reason we feel that the Dec/March inversion should increase further.
The market clearly lacks a sponsor at the moment. Specs are selling because the primary trend is down, while the trade believes in a big crop next season and is waiting to sell rallies. If these big crops in the US, India and elsewhere materialize, then the market will find it difficult to move higher and might eventually see more pressure. However, these crops still have a long way to go and the shorts need to be careful not to get too enamored with the bearish case this early in the game!
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