Market Comments – June 1, 2017

NY futures moved sideways this week, as July gained 47 points to close at 77.63 cents.
Since crashing back to reality the market has barely moved at all, with July closing the last seven sessions in a range of just 65 points, between 76.98 and 77.63 cents. The futures market seems to have found its equilibrium since it is getting close to convergence with the cash market. 
Spec longs and trade shorts continued to close out positions in the July contract, which this morning had an open interest of just 91,399 contracts. That’s down more than 50,000 contracts or 5.0 million bales since May 5, when July open interest had reached a record 141,874 contracts. 
Speculators have been calling it quits since July’s parabolic up and down move, but there haven’t been any massive sell stops hit so far, which is why the liquidation has been orderly and without much price movement. While speculators are selling, the trade is eager to cover its short position, which is to a large degree tied to unfixed on-call sales. 
The latest on-call report by the CFTC showed that as of last Friday, May 26, there were still 3.1 million bales to be fixed on July and we estimate that this number is down to around 2.7 million bales by today. Nevertheless, this is still a sizeable amount considering that there are only about three weeks left to get it done. We expect that these impending fixations as well as short covering tied to the sale of remaining basis-long positions should continue to absorb what spec longs are going to liquidate.
Meanwhile unfixed on-call sales for December onwards have increased by another 3,050 contracts or 0.31 million bales and are now at 8.15 million bales. These unfixed on-call sales are adding underlying support like they did in the current season, making it harder for the market to sell off. 
The bears are out in force when it comes to new crop, with some analysts expecting December to trade in the 50s later this year. Although anything is possible, we would put the odds for this to happen at perhaps 10 percent. Although plantings are increasing quite a bit in the US and around the globe, there are a number of factors that are acting in support of December and will at the very least slow down its downward movement. 
For one we are starting the new season with extremely low ROW pipeline stocks. According to the USDA the ROW will have 40.82 million bales to begin the new season with on August 1st. Over the last six seasons ROW stocks have ranged between 38.94 and 44.82 million bales. 
However, we don’t believe that this stock number is correct, because the USDA is overstating Indian beginning stocks by some 2.5-3.0 million statistical bales in our opinion. India simply does not have 11.99 million statistical bales or 15.35 million Indian bales in inventory at the end of July!

We believe that the true ROW stocks number is closer to 38.0 million bales, which would be below the range of recent years. The expected production surplus in the coming season will therefore serve to get ROW stocks from an extremely tight to a more comfortable level, but it will take some time to fill this depleted pipeline back up. 
Another reason for the bears to be cautious is the difficult start the US crop had this year. According to some growers in the Midwest and parts of the Southeast this has been the most challenging planting seasons in a long while, be it due to too much rain and cool weather, sand blasting, seedling disease or insect pressure. There was some acreage lost due to flooding and not all of it got replanted. Although the weather has been improving lately, this seems to be an uneven and late crop that has a lot of catching up to do. 
Texas still looks okay at this point, although some districts are in need of rain and fortunately the forecast calls for some moisture over the next 10 days. However, it will be a while before we know whether the US crop is going to live up to its potential.
So where do we go from here? The rapidly declining open interest in July is sucking the energy for a big move out of the market, and we haven’t even reached the major index roll yet. With July now near its cash value, we expect it to trade in a fairly tight range over the next 2-3 weeks. If technical support levels get breached and specs react to it we could see some flush out dips, but by and large we expect July to be trading in a 76-79 cents range.
December should hold in the low 70s over the next couple of months until crop prospects become clearer. With Dec open interest already at 12.5 million bales, we don’t expect there to be a lot more selling pressure until later in the growing season. Depleted pipeline stocks at the end of summer combined with a somewhat late crop will make it difficult to trade December from the short side. For this reason we advocate to use March put options for any new crop hedging!


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