Market Comments – May 11, 2017

NY futures ended the week slightly higher after a roller-coaster ride, with July gaining 27 points to close at 79.18 cents.
After the market had been on the defensive for most of the week, July suddenly found new vigor today and posted its strongest performance of the year. Volume was massive with over 67,000 futures and 13,000 options traded, which puts some emphasis behind this powerful move!
Since last Friday open interest in July dropped by 1.04 million bales to 13.14 million bales and momentum had turned negative as some speculators were apparently leaving the game. But friendly WASDE and export sales numbers coupled with July’s ability to hold above the long-term uptrend line turned the market on its head today.    
Yesterday’s WASDE report showed a clear delineation between bullish current crop statistics and a bearish new crop outlook. After another strong export sales report this morning the market finally acted on these scenarios by pushing the July/Dec inversion out another 249 points to a closing value of 665 points.
The USDA increased current crop exports from 14.0 to 14.5 million bales and dropped US ending stocks from 3.7 to just 3.2 million bales, which is not far above the minimum needed to supply domestic and foreign commitments during the August to October time frame.
The 2017/18-estimate on the other hand showed a 7.34 million bales increase in global production to 113.22 million bales, which would be only slightly less than the 115.75 million bales in mill use. Globally there would still be a small production deficit of around 2.5 million bales, which is the result of a ROW surplus of 11.5 million bales and a deficit in China of 14.0 million bales.
Since China will continue to destock its strategic reserve next season, about 9.0 million bales of this production shortfall might get supplied from reserve stocks and only 5.0 million bales from imports. This would result in a sharp increase in ROW ending stocks from currently 40.8 to 47.5 million bales, which is where the bearish argument for new crop comes from.
However, all this needs time to play out! So far these are just projections and there is still a lot of weather to negotiate before these crops become reality. Furthermore, if prices were to fall as precipitously as some analysts in the US predict, then China might import a lot more cotton than just 5.0 million bales next season, which would alter the scenario. However, we believe it is fair to say that new crop prices are more likely to see some price pressure over the coming months than the reverse, but to throw price targets in the mid-to-high 50s out there is premature in our opinion, especially when it comes to the December contract!
US export sales remained strong as merchants and coops are trying to empty their warehouses, with a combined 323,800 running bales of Upland and Pima cotton finding buyers in 19 markets. Shipments were excellent as well as 428,400 running bales were exported to 25 destinations. Total commitments are now at 14.55 million statistical bales, of which 11.0 million bales have already been exported. Sales for August onward shipments, which are to a large degree supplied from existing stocks, have already reached 2.6 million statistical bales.
After the close the CFTC released the latest “on-call report”, which showed that as of last Friday there were still 4.62 million bales unfixed on July, which was up 83,100 bales from the week before. This number has probably been reduced slightly during the first three days of this week, but nevertheless remains alarmingly high! On-call sales for new crop increased by 322,100 bales last week and amounted to 6.7 million bales for December and later months.
So where do we go from here? Today’s powerful move in July was a wake-up call for the many trade shorts that still remain in the game. It has also put any further spec long liquidation on hold for now and we may actually see some specs come back into the market based on this performance.
With the inversion to December widening, speculators should now feel comfortable riding this thing out. July is taking on a life of its own and there is no telling where this story is going to end, but the shorts are living dangerously and may get trapped. If there is some follow-through buying and July makes new highs (March 6 high is 80.27), then a move into the mid-80s becomes possible in our opinion.
New crop is now clearly divorcing itself from the July game, but with the pipeline empty by the end of the summer December becomes a difficult month to trade. On the one hand the new crop outlook will weigh on it, but on the other hand there is support from early new crop demand and the 3.1 million bales in unfixed on-call sales. As mentioned before, we feel that it makes more sense to use the March contract to bet on a bearish new crop scenario!


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