NY futures came under renewed pressure this week, as December lost 198 points to close at 66.37 cents.
December closed today at its lowest level since August 31, 2016, as the market remains stuck in a negative mindset, stemming from weak technical action and fears of an oversupply situation in the coming season.
The WASDE report added to the negative vibes, as global output for the 2017/18-season was increased 630,000 bales and is now projected at 115.36 million bales. However, global mill use went up as well, by 520,000 bales, and the 117.03 million bales would be the highest consumption number in eight seasons.
Global ending stocks at the end of this season were raised 930,000 bales to 90.27 million bales, which was mainly due to lower exports from Australia (400k) and higher ending stocks in India (250k). We don’t agree with the USDA on both counts, since the Australian crop is not 4.4 million bales, but somewhere around 3.8-3.9 million bales, while India’s ending stocks are nowhere near 12.24 million statistical bales (or 15.67 million Indian bales). We feel that the Indian ending stocks number is 4-5 million statistical bales lower than that!
Much of the bearishness about next season comes from the fact that the USDA sees ROW inventories (=stocks outside of China) rise from 41.87 million bales at the end of this season to a rather depressing 49.38 million bales at the end of next season. However, we believe that ending stocks for the current season are overstated as explained in the above paragraph.
In other words, we may not start from a nearly 42 million bales inventory number at the end of this season, but possibly from a much tighter 36-37 million bales level. Or does anyone seriously believe that we are ending this season with the third highest ROW stocks in the last ten seasons? The US is basically sold out and so are most other origins!
If stocks are indeed as tight as we believe, then it becomes even more crucial that nothing goes wrong with the major crops over the next 3-4 months. The US crop had a challenging start but seems to be improving, although abandonment will be quite a bit higher than last season, especially in West Texas.
While last week’s storms brought some much needed moisture to the region, they also caused some wind and hail damage, with some counties west of Lubbock losing as much as 30-50% of their acreage. There are other pockets in the northern panhandle and New Mexico that had similar problems. At this point it is difficult to assess the potential for Texas, but it seems unlikely that we will see another bumper crop like last season, when Texas produced 8.1 million bales.
Last season Texas planted 5.65 million acres and harvested 5.2 million with the second highest yield ever. This season plantings increased 0.95 million acres to 6.6 million acres, but it is doubtful that a lot more acres than last season will get harvested. The rest of the cotton belt still has about a million acres more than a year ago and if everything goes well then a crop of 19 million bales is still possible, but the margin for error has already been used up!
US exports sales finally started to slow down, which makes sense since old crop stocks are basically all committed by now and merchants/coops are reluctant to add more sales for 4th quarter shipments. Net new sales still amounted to a respectable 170,300 running bales of Upland and Pima cotton, while shipments slowed down to 202,700 running bales.
Commitments for the current season are at 15.66 million statistical bales, of which 13.81 million bales have so far been exported, with 3.6 weeks to go in the marketing year. Meanwhile sales for August onward shipments have risen to 4.9 million statistical bales. This means that if we carry over an estimated 1.1 million bales from the current season, then export commitments for 2017/18 are already at 6.0 million.
So where do we go from here? The market is still in search of solid support, but with speculators continuing their net selling and with the trade afraid of the long side, the market could drop more in the weeks ahead.
The CFTC showed speculators at just 2.18 million bales net long as of July 3 and this position has probably declined further since. This means that speculators have sold more than 10 million bales net since February and they may not be done yet. It is possible for specs to go net short like they did in early 2016 and this could set the market up for a short covering rally later on.
From a fundamental point of view we should see strong support in the low-to-mid 60s from a) tight US and global ending stocks, b) a vanishing certified stock, c) the MSP in India, which will divert demand to the US if market falls further, d) 8.45 million bales in unfixed on-call sales from Dec’17 to July’18, e) a weakening US dollar and f) potential problems in any of the major crops.
We feel that the market is ignoring an empty supply pipeline and behaves as if a 19-20 million US high-grade crop and bumper crops elsewhere were already a done deal. The market may ultimately be right, but there is little or no margin for error, not just in regards to quantity, but also when it comes to quality. For now the path of least resistance is lower, but it all hinges on the crop progress over the coming months!
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