Market Comments – December 7, 2017

NY futures continued to advance this week, with March adding another 142 points to close at 74.23 cents.
March settled today at a 7-month high, moving past the Hurricane Harvey peak of early September. The next target is the 75.57 cents contract high (closing high of 75.51), dating back to March 20 of this year. Momentum indicators remain in ‘overbought’ territory, but that hasn’t stopped the market from pushing higher. 
In our last report we talked about the strong correlation between the spec net long position and the price of cotton. Just when it looked like the market was getting ready for a pullback, renewed spec buying forced it out of a flag formation today, which propelled values to their highest level since early May. 
The latest CFTC report showed just how aggressive speculators have been over the Thanksgiving holiday period. In the 3-1/2 sessions between November 22 and November 28 speculators bought 1.73 million bales net, boosting their net long to 7.02 million bales. Since then open interest has risen further and we therefore estimate speculators to be around 8.0 million bales net long by now. 
The trade sold into the rising market, increasing its net short position by 1.57 million bales to 14.06 million bales. Index funds were also light net sellers, reducing their net long by 0.16 million bales to 7.04 million bales. 
While speculators have been accumulating longs, mills as well as other members of the trade are desperately hoping for an opportunity to get out of some short bets. However, the latest on-call report of this afternoon still showed no improvement in the near record on-call position. 
As of last Friday total unfixed on-call sales grew by 0.32 million bales to 14.50 million bales, of which 5.60 million are on March, 2.88 million are on May and 2.96 million are on July. That adds up to 11.44 million bales in fixations over the next six months, which is a record for that time span. No wonder the market can’t catch a break!
US export sales continued to grow despite cancellations of 105,800 running bales, as net new commitments increased by 239,900 bales of Upland and Pima. There were 17 markets buying, while 23 destinations received shipments of 270,300 running bales, a marketing year high. Total commitments for the season have now risen to 10.6 million statistical bales, of which just a little over 2.6 million bales have so far been exported. 

The December contract had its last trading day on Wednesday and it went off the board at 75.17 cents. For the first time ever there were no notices issued during a December delivery period, which means that the certified stock of around 48k stayed with its current owners. That’s remarkable because not only is the market inverted, which means it doesn’t offer any help carrying cotton, but some of the qualities and warehouse locations aren’t desirable. This has put many of the March shorts on alert!
So where do we go from here? The market has a sell-side liquidity problem, similar to what we saw last season. Speculators like the market’s strong performance and are adding to their net long, while the trade is desperately hoping for a break in order to get out of some shorts and/or to fix its over 11 million bales in current crop on-call sales.
But in order for the market to move lower someone has to sell it, and right now we don’t see enough willing sellers. There is still some scale-up grower selling, but merchants have already committed a lot of cash cotton and are therefore running a smaller short book in New York, while mills have yet to price a lot of the cotton they bought. 
The futures market could eventually become overpriced in relation to cash values and this might lead to an increase in certified stock, but the next notice period is still 50 sessions away. In other words merchants don’t really have a tool to reign in the specs at the moment and the way the December notice period ended has many shorts scratching their heads. 
Next Tuesday’s WASDE report will provide the market with a new set of numbers to digest. It is difficult for the numbers to get more bearish than they already are, since the crops in India and the US are getting smaller, while global mill demand continues to be strong. And then there are of course the ‘phantom stocks’ the USDA is carrying in its balance sheet that will have to be corrected at some point. We therefore feel that the report will either be neutral or friendly to the market. 
Speculators are currently in control and that is not likely to change anytime soon. With trade support moving up underneath the market, it all adds up to a higher trading range of 71-76 going forward.


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