NY futures continued to advance this week, as May gained another 59 points to close at 59.03 cents/lb.
After strong back-to-back gains last Thursday and Friday, the market spent the last four sessions consolidating its recent advance in a very tight trading range of just 94 points. Today’s trading action was somewhat disappointing, after an excellent export sales report and another round of de-certifications failed to provide the necessary momentum to push higher. Traders are still waiting for clarification on China’s reserve price policy and until this uncertainty has been lifted, a lot of potential buyers will remain sidelined.
The most recent CFTC report showed that speculators once again reversed course and surprisingly added more shorts in the week of March 23-29. The spec net short position grew by 0.34 million bales to a record 4.49 million bales, with outright shorts accounting for 10.56 million bales. The trade is just 2.50 million bales net short, while Index Funds hold a 6.99 million bales net long. We still believe that this large spec short position has the potential to move the market substantially higher, but at the moment we seem to lack the trigger mechanism to set a short-covering rally in motion.
US export sales beat most expectations, as a total of 252,800 running bales of Upland and Pima found a home in the week of March 25-31. Vietnam and China took the lion’s share with over 60,000 bales each and participation continued to be broad based with 18 markets buying. Shipments of 344,100 running bales to 25 destinations were the highest of the season so far and reduced the unshipped portion to around 2.7 million running bales.
Total commitments for the season now amount to just under 8.1 million statistical bales, of which around 5.3 million bales have so far been exported. Sales for next marketing year add up to around 1.15 million statistical bales so far, which is 0.2 million bales ahead of last season.
Another positive development for the bulls has been the reduction of the certified stock, which as of this morning amounted to just 36,316 bales, or less than half of what it was a month ago. Judging by the high basis levels that are currently being paid for remaining US premium qualities, we believe that it will become increasingly difficult to replenish the certified stock, at least at current prices.
Despite some positive fundamental developments and a chart that looks quite constructive at the moment, the market lacks excitement. The uncertainty about China’s reserve policy seems to be one good reason for this, but we also sense some renewed worries over the state of the global economy and maybe we are headed for another ‘risk off’ period.
Recent economic data continues to disappoint and the US seems to be at the precipice of a recession. Two days ago the Atlanta Fed, which runs a real-time model that predicts GDP growth, lowered its forecast for the 1st quarter to just 0.4%, after it had been at 2.3% less than a month ago. This nosedive is a reflection, among other things, of poor consumer spending as well as negative durable goods and factory orders.
The problem, which doesn’t just apply to the US, is structural. There is way too much debt, a lack of savings, underfunded pension and social security liabilities, latent unemployment or underemployment, overcapacity in many sectors, rising cost of living – the list of things that are putting the economy in a chokehold goes on and on. Add to this the lack of political leadership, a frustrated population and failed central bank policies, and it becomes clear that there might be another financial storm brewing.
For the last seven years central bankers have been fighting off an imploding debt bubble with the printing press and cheap interest rates, creating an even bigger debt monster in the process. Since we don’t believe that they will change their playbook anytime soon, the most likely outcome is going to be stagflation or an inflationary recession in our opinion.
Such a situation would make trading quite difficult, because intuitively one would expect prices to move lower, but the inflationary component in this scenario may actually force nominal prices higher as the money supply keeps increasing. Currencies would fluctuate widely as well in such an environment.
For now the US dollar still benefits from its safe haven and reserve status, as well as more attractive Treasury bond rates than Europe or Japan. But if the Atlanta Fed is correct with its forecast and the US economy is indeed headed towards zero or negative growth, the Fed would have to restart some sort of a QE program and lower interest rates. This would weigh on the US dollar and lend support to dollar-denominated assets, such as commodities.
So where do we go from here? We remain cautiously optimistic on current crop prices, due to the tightness in premium grades over the coming months and the record spec short position, but we are keeping a keen eye on economic developments and a potential shift in investor sentiment to another ‘risk off’ stance.
Today’s trading action was disappointing and reminded us of the old saying that ‘its not the news that matters, but how markets react to the news’. The market seems to be telling us that it needs to pull back and regroup before possibly launching another attempt at the 60 cents level.
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