Market Comments – February 9, 2017

NY futures pulled back this week, as March dropped 133 points to close at 75.58 cents.
After having rallied by more than 500 points in less than three weeks, the market ran out of steam at the end of last week and needed to regroup. From a bullish perspective the market simply took a breather in an uptrend that is still very much alive, since the market held above support at 75 cents, while the bears feel that the market has been overextended for some time and is now finally shifting into reverse. 
At 75 cents the market sits on a razor’s edge and a case can easily be made for a 2-3 cents move to either side. What speaks for the bulls in the short term is that mills haven’t made much progress with their fixations. The weak appearance by the market late last week and early this week may have given mills (false) hope that prices are about to collapse, which has prompted many of them to pull back their buy scales.
According to the latest on-call report there has been only a small reduction in March fixations last week, as there were still 2.86 million bales unfixed when trading started this week. This number has no doubt dropped further over the past few sessions, but probably not to a level at which mills can relax. 
There are still two more sessions in the index fund roll period that will provide sufficient liquidity for mills to get their March fixations squared away and tomorrow’s option expiration will also offset some positions. But we have an uneasy feeling that there are still plenty of procrastinators left when liquidity dries up next Tuesday. 
Overall the amount of unfixed on-call sales continued to increase last week, as May and July picked up over 200,000 bales each. At the beginning of this week there were 12.09 million bales yet to be fixed, of which 9.49 million were in current crop March, May and July. The total ties the record of early November 2010, when also 12.1 million bales on-call sales were still unfixed.
Meanwhile open interest in the futures market remains at an elevated level of 28.3 million bales despite the ongoing March liquidation. March open interest fell by about 3.3 million bales during the first two days of the index roll and amounted to 10.4 million bales before today’s session. But overall open interest is only down 0.5 million bales from last week, as both the specs and the trade continue their tug-of-war into May.
Today’s much anticipated USDA supply/demand report failed to provide the market with new stimulus since there were no major surprises. However, on balance the report was somewhat supportive, since ROW ending stocks dropped by 1.25 million bales compared to last month and are now estimated at 41.05 million bales. The change in ROW stocks was mainly due to some crop reductions in Pakistan (-0.2 million bales) and Central Asia (-0.22 million bales), while mill use saw an increase with Vietnam (+0.2 million bales) and Bangladesh (+0.15 million bales) leading the way. 
The 41.05 million bales in ROW ending stocks should still be plentiful to allow for a smooth transition to the 2017/18-season and they sit right in the middle of the inventory numbers we experienced in the previous two seasons, when the 2014/15-season finished with 44.8 million bales and the 2015/16-season had only 38.6 million bales available. 
US export sales continued at an impressive pace considering that Chinese buyers were on holiday, as 258,100 running bales of Upland and Pima were added to the tally. There were 20 markets buying, while 24 destinations received shipments of 464,000 bales, which was a high for the season. Total commitments are now at 10.7 million statistical bales, of which 5.7 million bales have so far been exported.
The pace of sales over the last ten weeks has simply been phenomenal, as no less than 3.5 million statistical bales have been sold and 2.8 million bales were shipped. Sales will have to slow down considerably from here on out, since the US cannot keep selling at an average of 350,000 bales a week for much longer. The US is usually in the role of ‘residual supplier’, but this season it has taken charge and front stepped most other origins, who will now have to fight for the remaining open slots in the 2nd and 3rd quarters.
So where do we go from here? The market felt heavy this week, as it lost its upside momentum and threatened to sell off into the low 70s. However, when we take a step back and look at where the market sits today, we notice that it is still only a little over 200 points below the August 2016 high of 78 cents. Beyond that we have to go all the way back to May 2014 to find higher prices. Although the market took a breather this week, the uptrend on the daily and weekly chart is still very much in force.
The near record high open interest, which has not come down much despite March being in liquidation, speaks to the willingness of the specs to remain long going forward. It also shows a certain stubbornness by the trade, especially by mills who still need to fix a record amount of on-call sales, to keep fighting this uptrend in the hope of catching a break one of these days. The trade keeps kicking the can down the road for now and is trying to buy some time, but sooner of later a lot of these shorts will have to be bought back. At the very least it will translate into a massive amount of support underneath the market, but it also has the potential to provide the fuel for the market to move higher. 


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