NY futures came under heavy pressure this week, as July collapsed 464 points to close at 71.91 cents.
July longs capitulated this week as the ongoing liquidation forced prices sharply lower. Specs have been on the way out for a while now, but became more aggressive sellers once the market broke below the primary uptrend, which had been in force since late February 2016. July subsequently broke through the 7550 and 7300 cents support areas with relative ease.
The trade recognized the negative momentum and pulled back its scale down buy orders, letting the market fall into a void of buying. Large open positions in the 73-76 strike puts added to the selling pressure, as traders who were short these options had to play defense by either buying them back or by selling futures.
A look at the candlestick chart shows that sellers were firmly in control, with the market opening near the highs and closing near the lows of the session every day of the week. However, the precipitous collapse over the last 22 sessions, which saw the market crash from 88 to 72 cents, has led to ‘oversold’ conditions. This is setting the market up for a decent bounce in our opinion!
Last Friday’s somewhat sloppy WASDE report robbed the bulls of their last hope, since the USDA ignored the strong pace of US exports and didn’t feel it necessary to revisit the stock situation in China and India. The report therefore painted a rather bearish picture with a projected ROW ending stocks number of 48.36 million bales, which would be way above the last ten years, when ROW inventories ranged from 31.80 to 44.82 million bales.
If realized, such ample ROW stocks might indeed put quite some pressure on prices next season. However, we believe that ROW stocks are not quite as plentiful at the end of July as the statistics are telling us and there is still a long way to go before the next crop is safely in the barn. The US planting season has been rather drawn out and challenging in parts of the cotton belt, with the Mid-South and Southeast seeing a lot of rain and stormy weather, while West Texas has been dry and sizzling hot lately. A perfect summer and fall could still make a big crop, but there isn’t much margin for error.
Today’s US export sales report was once again better than expected, as 270,300 running bales of Upland and Pima cotton were sold for both marketing years. Shipments were a bit slower at 245,800 running bales, but still on pace to surpass the current USDA estimate. Total commitments for the current season are now at 15.1 million statistical bales, of which 12.8 million have already been exported. Sales for August onward shipments are at 3.6 million statistical bales.
That means that at the moment we have total unshipped commitments of around 5.9 million bales and assuming that another 1.9 million bales will get exported until the end of July, we would start with around 4 million bales on August 1st. To that we will have to add whatever is sold for export between now and the end of July (let’s say 1.3 million bales over eight weeks), plus the 3.3 million bales domestic mills will require next season.
In other words, we would already have 8.6 million bales in commitments at the start of the new season and this number will grow bigger still during the August to October period as additional export commitments are made. We therefore estimate that there will be some 10-11 million bales in commitments on the books by the time the bulk of the US crop is harvested.
This may not seem like a large number compared to an estimated supply of over 22 million bales, but the problem we see developing is that most of these commitments are bunched into the August to December shipping period. Considering that the supply pipeline will be nearly empty at the end of summer and that the US crop is a little late, we could see a mad rush to make all these shipments on time. This also makes the certified stock of currently 472k a valuable commodity, especially at today’s discounted price!
So where do we go from here? The market is overextended to the downside after this liquidation drive and is likely to give us a bounce, possibly after tomorrow’s options expiration. If there is still a relatively large open interest left after all the options have cleared, then July might flare up again, especially since the certified stock has become so attractive.
December has been getting a bit ahead of itself for reasons explained above and may start to pay attention to fundamentals again once July is off the board. New crop prices will likely trade lower than their current level at some point next season, but it won’t be a straight line down from here!
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