Market Comments – June 22, 2017

NY futures collapsed further this week, as December dropped another 273 points to close at 66.74 cents.

The December contract looks like it fell over a cliff ever since it broke below crucial support at just over 72 cents. Today marked the 10th consecutive lower close for a combined loss of 636 points.

Even more dramatic is the drop from the May 15 high, when the spot month at the time (July contract) was trading as high as 88.40 cents synthetically. Just five-and-a-half weeks later the current spot month (Dec contract) is trading nearly 2200 points lower. However, while the futures market has experienced these extreme swings, the cash market has seen a much more moderate trading range of around 7-10 cents during the same time frame, depending on the growth.  
While the exacerbated move to the high 80s was fueled by short covering, the current selloff has been the result of aggressive spec and trade selling. The first wave down was clearly caused by spec long liquidation in July, as July open interest was melting away rapidly, while Dec open interest was still going up. 
However, July was pulling Dec down with it and this caused the trade to hasten its new crop short hedging, which eventually forced Dec through support and led to the precipitous fall we have witnessed over the last ten sessions. 
In the first nine sessions of this decline December open interest actually went up by around 1.6 million bales to over 16.0 million bales! The scary thing is that spec long liquidation in December might still be ahead of us and today we probably saw the first wave of spec longs headed for the exit. 
The current open interest in December is the second highest ever for this day, surpassed only marginally by the 16.2 million bales that were open in 2008. Therefore, if speculators, many of which are guided by algorithms, were to hit the ‘flush’ button, then this selloff might have a lot further to go.
Today was a great example of the divergence between supportive fundamentals and speculators that couldn’t care less, when a massive export sales report was shrugged off by the market and prices continued to collapse. 
US export sales for the week that ended on June 15 were surprisingly strong at 652,300 running bales combined, of which 177,000 bales were basically for prompt shipment (June/July). There were a total of 17 markets participating in the buying, although Vietnam and China accounted for the lion’s share. Shipments of 266,300 running bales were still above the pace needed to reach the current USDA estimate of 14.5 million statistical bales. 
Total sales for the current season have now reached 15.2 million statistical bales, of which 13.05 million bales have already been exported. Commitments for August onward shipment have already reached 4.1 million statistical bales, of which a substantial amount will be shipped from existing inventories.
This brings us to the certified stock, which has kept building in recent weeks and currently measures nearly 488,000 bales. According to our calculation the unsold balance of the 2016/17 crop is down to around 0.4 million bales, although this number could vary by several hundred thousand bales depending on how many of the August onwards commitments are being shipped out of existing stocks. 
Nevertheless, we are getting to a point of being technically sold out and we believe that most of the certified stock is already part of existing sales. It will therefore be interesting to see what happens when July goes into its notice period next week. If the certified stock remains with current owners or if some takers were to emerge, it could send a bullish signal to the market and serve as a warning to the many December bears. 
So where do we go from here? After a parabolic move to the upside last month, we now have a similar situation to the downside. Given the still sizeable spec net long position in December this selling pressure could persist as long as speculators feel a need to get out of the cotton market. We have seen similar moves in other soft commodities recently, be it sugar, coffee or cocoa. 
Also, when markets are in liquidation mode they can remain in “extreme oversold” conditions for quite a while and therefore momentum indicators need to be viewed with some caution. 

The best hope for the bulls is that next week’s notice period will serve as a reality check and remind the market that a) we are sold out of current crop and b) new crop is still a long way from being made. 
Although West Texas has seen a few thunderstorms yesterday and is expecting more moisture over the weekend, the crop still has a lot of weather to negotiate. The same goes for parts of the Mid-South and Southeast, where many fields have been inundated with too much moisture in recent weeks. We understand that in Alabama some fields have actually been wiped out by flooding.
This may not matter much to speculators who feel trapped on the wrong side of the primary trend, which is now clearly down. We therefore have not way of knowing where the bottom of this powerful selloff is.


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