Market Comments – April 26, 2018

NY futures pushed higher this week, as July gained 135 points to close at 84.17 cents.

It was a volatile week, with July traversing a fairly wide range of 403 points, between 81.36 and 85.39 cents. Renewed financial market jitters and technical weakness caused the market to briefly cave in on Tuesday, but it turned out to be just another ‘bear trap’. We had a similar occurrence on April 4, when the marked fell sharply, but then quickly reclaimed lost territory in the following session. 

The ability to shrug off such reversal attempts fuels the bulls with even more confidence. Not that they needed it, because fundamentals as well as the chart are already quite constructive. Some traders were surprised that the market didn’t react more positively to another stellar export sales report this morning, but this may just be due to the current standoff between spec longs and trade shorts, as neither side feels compelled to jump into action at the moment. Today’s relatively low volume seems to support this notion.  

However, time is on the side of speculators, because over the next 7-8 weeks mills will have to fix over 5 million bales on July, which means that the current trade net short position will have to get reduced substantially. Speculators on the other hand may decide to stay net long and simply roll their July longs into a cheaper December position. Trade shorts are still hoping for another spec exodus, which is what happened a year ago, when speculators liquidated a 10.85 million bales net long down to just 1.3 million bales in a matter of eight weeks, starting in the middle of May. 

This time may be different though, because the new crop outlook is not nearly as bearish as last season, at least not yet. West Texas is still waiting for rain to get its crop going, and even if they were to get some moisture over the next 4-6 weeks, the long-term outlook does not favor another bumper crop. And with the cotton pipeline likely to be empty by the end of the third quarter, December has a more bullish feel than last season, when everyone started talking about prices in the low 60s. In other words, unless there is something that scares speculators out of their positions soon, we feel that the trade will get the short end of the stick this time.

What makes the trade’s position more precarious this season is that index funds are holding a much larger net long positions. Index funds, which are passive investors and don’t react to price fluctuations in a particular commodity, were 8.32 million bales net long on April 17, which was 2.06 million bales more than a year ago. By contrast the spec net long position of 8.42 million bales was 0.49 million bales smaller than at the same date last season, while the trade net short of 16.74 million bales was 1.57 million bales larger. This means that the ratio of spec longs to trade shorts is less favorable for the latter. There are more shorts, but fewer active players on the long side! 

As already mentioned, US exports were fantastic last week, as net new commitments of Upland and Pima cotton rose by 577,300 running bales for both marketing years combined. Once again we had broad-based participation with 19 markets buying, while 26 destinations received shipments of 427,900 running bales. 

For the current season we now have over 16.7 million statistical bales on the books, of which 9.9 million bales have already been exported. Commitments for shipment August onwards are already at 3.5 million statistical bales. This means that if the US were to ship the current USDA estimate of 15.0 million bales by July 31st, we would begin the new marketing year with already 5.2 million bales in commitments (1.7 carryover + 3.5 sales August onwards) and there are still nearly 15 weeks of additional sales data to go. This will likely be one of the tightest balance sheets we have ever seen in the US!

So where do we go from here? The short answer is higher, potentially a lot higher, unless something were to shock spec longs into abandoning their positions again like last season. But as we have tried to explain, the odds for this to happen are much smaller this time around and the current set up looks ripe for a short squeeze. The bulls may have to be patient as the standoff between spec longs and trade shorts might continue for a few more weeks, but we feel that the trade shorts will ultimately be on the run.

 

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