Market Comments – November 9, 2017

NY futures closed the week slightly lower, with December giving up 79 points to close at 68.29 cents.
December remains confined to a very tight range, having closed the last eleven sessions in a 101-point box between 68.07 and 69.08 cents. If we zoom out further we notice that December sits right in the middle of a two-month trading range of 67-70 cents and a five-month range of 66-71 cents, not counting the seven-session excursion into the mid-70s in early September. 
Even today’s much anticipated WASDE report was unable to wake the market out of its comatose state. The supply/demand report contained something for everyone. The bears will point to the slightly higher US crop production (+0.26 million bales) and a bigger Chinese crop (+0.5 million bales), while the bulls were happy to see another big jump in global mill use (+1.24 million bales) and a sizeable downward revision of global ending stocks (-1.50 million bales).
The ending stocks adjustment came as the result of multi-year revisions in several origins and consuming markets, with Argentina, Australia, Bangladesh and Uzbekistan seeing the largest changes. In the case of Argentina the USDA went ten years back and increased mill use by a cumulative 0.7 million bales, which led to the lower stock number. While we are glad that the government is finally addressing some of these ‘phantom stocks’, we have yet to see revisions for the two biggest discrepancies, which are in China and India.
According to the USDA the 2017/18-season is going to set a number of new records. ROW production of 96.5 million bales would be the highest ever, breaking the previous high mark of the 2011/12-season by 3.0 million bales. ROW mill use of 80.25 million bales would also set a record, topping the 2014/15 high by 3.4 million bales. 
Then there are the ROW ending stocks, which at 51.2 million bales would be 7.0 million bales higher than the previous record dating back to 2014/15. However, since we don’t believe that India’s stocks are anywhere near the 14.63 million bales the USDA uses, ROW ending stocks are probably closer to 46.0 million bales, which is still high, but not quite as threatening to the market. 
Another number we have some trouble with is the 900-pound yield record of the US crop. In its initial August estimate the USDA had harvested acreage at 11.05 million acres with a yield of 892 lbs, for a total crop of 20.55 million bales. Then in September it increased harvested acreage to 11.50 million acres, which combined with a yield of 908 lbs gave us the so far highest crop estimate of 21.76 million bales. 
Despite hurricanes Harvey and Irma, some hailstorms and a hard freeze in West Texas the government has kept harvested acreage at 11.40 million acres and the national yield at 900 pounds, which would be 33 lbs/acre more than last year’s bumper crop! Given all the problems Texas had this growing season it is difficult to believe that it is going to achieve a 5 lbs/acre better yield than last year, which was a phenomenal crop with hardly any issues.
US export sales for the week that ended on November 2nd continued to stay ahead of the pace needed to make the 14.5 million bales USDA estimate. Total sales for Upland and Pima combined amounted to 249,900 running bales for both marketing years. Participation remained strong with 19 markets buying and 21 destinations receiving shipments of 128,300 running bales. 
Total commitments for the season have now reached 9.2 million statistical bales, of which a little over 2.0 million bales have so far been exported. Sales for the 2018/19-season are currently at 0.95 million statistical bales.
So where do we go from here? Today’s WASDE report didn’t give the market a reason to break out from its current trading range. On the one hand we still have a sizeable seasonal surplus and an inventory buildup later in the season, but on the other hand mill demand has now risen to a plateau of nearly 120 million bales, which requires continued near-record crop production in the ROW going forward. 
There has been a shift in sentiment in recent weeks, with mills no longer dreaming of fixation levels in the low 60s, but instead hoping to lock in the price in a 65-67 cents range.  The record 14.15 million bales in unfixed on-call sales, of which 11.37 million are on Dec, March, May and July, are providing a strong layer of support underneath the market. Add to that the quality problems we encounter in the US and Indian crops this year, and it will be difficult to make the case for much lower futures prices. 
We therefore feel that the market will remain in a broader trading range between 66-71 cents over the coming months.

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