NY futures continued to slip this week, as December gave up another 120 points to close at 66.91 cents.
Sellers remained firmly in control of the market this week, as December has now lost over 400 points in the last six sessions. Volume has been lackluster and open interest in December has been steadily declining, which hints at some long liquidation.
The trade was clearly surprised by last week’s bearish WASDE report and now finds itself in an under-hedged position, in a declining market. The latest CFTC report showed the trade at just 10.0 million bales net short as of August 8, which was two days before the supply/demand report.
That’s not enough considering the bearish USDA balance sheet, which currently predicts ROW inventories to increase by 9.15 million bales to an all-time high of 50.74 million bales. Producers therefore need to get more of their crops hedged, while merchants will want to lock in more of the 11.25 million in unfixed on-call sales by selling futures or running bearish options strategies.
The problem is that the futures market is a zero-sum game, which means that if the trade (growers, merchants and mills) wants to collectively increase its net short position from the current 10.0 million bales to let’s say 15.0 million bales, then it would require speculators and/or index funds to increase their net long position by 5.0 million bales.
However, unlike last season speculators have currently no appetite for the long side due to the negative price action and the primary trend pointing lower. Spec shorts are no longer covering and spec longs are more likely to cut their positions than add to them. In other words, there are plenty of potential sellers and not enough sponsors on the long side, which means the market will have to trend lower until it finds decent support. This will likely come from mill buying and fixations at some point, but mills seem to have lowered their price ideas after the WASDE report.
The only thing that could turn this market around anytime soon would be a crop scare, but at the moment most areas still look promising. Texas got a lot of rain lately and now needs a warm and open fall to reach the crop’s full potential. The long-range forecast calls for below average temps and above average precipitation, which is raising some concerns, but nothing too worrisome yet.
The same goes for the Delta and Southeast, which have gotten plenty of moisture this season and now need an open fall to drive the crop home. We also hear of whitefly infestations in Georgia and Alabama, but so far growers seem to have a handle on the situation.
US export sales for the week that ended on August 10 were quite good considering that prices were above 70 cents at the time. Net new sales for Upland and Pima cotton amounted to 257,500 running bales for both marketing years, with 19 markets participating. Shipments amounted to 204,400 running bales.
Total commitments for the current season have already reached 6.5 million statistical bales, of which 0.35 million bales have been shipped so far. Additionally there are over half a million bales on the books for the 2018/19-season.
So where do we go from here? Since crops are not quite made yet, selling pressure is starting to subside below 67 cents, while there is some light scale down mill buying becoming evident. This has lead to a slightly more two-sided affair over the last couple of sessions.
However, as explained above, the trade needs to increase its net short position and we therefore expect any rallies to be short-lived. If crops reach their potential, then the shorts will eventually have to become more aggressive and this could push values to new lows.
Nevertheless, we still feel that due to the empty pipeline and the lateness of the crop the Dec/March inversion is here to stay, since early arrivals will have eager takers. Once the crops have moved in we should see the excess supply force greater carry into the March/May and March/July spreads, possibly all the way to full carry.
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