NY futures closed a rollercoaster week basically unchanged, as July edged up just 6 points to close at 84.56 cents.
The market saw a lot more volatility this week, as July rallied to a new contract high of 88.08 cents before pulling back to the breakout area. This move eclipsed last year’s high by 90 points and was the highest a spot month has traded at since June 2014.
From a technical perspective the market has become a bit more vulnerable though, as price action has turned weak since posting new contract highs earlier in the week. July has closed below the 85 cents support area today and further weakness would intensify spec sell-stops below 8400 and then 8325 (50-day moving average).
Today’s action reminded us of the old saying that “it’s not the news that matters, but how the market reacts to the news”. We had two supportive reports this morning (US export sales and WASDE), yet the market decided to sell off regardless. This is clearly a warning sign and we need to pay close attention to what happens over the next few sessions.
US export sales showed no signs of letting up last week, despite rumors about cancellations and lackluster mill demand. Net new sales of Upland and Pima cotton amounted to 425,300 running bales for both marketing years combined. There were still 20 markets buying, while 26 destinations received shipments of 520,800 running bales.
For the current season we now have commitments of 17.2 million statistical bales, of which 11.0 million have so far been exported. Sales for August onward shipments are now at 4.05 million statistical bales, which is 1.35 million bales more than last season.
If we add up all existing export and domestic commitments for this season and next, we come up with 28.0 million bales (21.25 export and 6.75 domestic), against which there is an existing supply of 23.67 million bales (2.75 stocks and 20.92 crop). This means that there are currently 4.33 million bales against which there is no cotton yet and this number keeps getting bigger by the week.
By comparison, last year’s number was 2.83 million bales at this point in time and we had a more optimistic outlook on Texas. In other words, we expect pipeline stocks to get extremely tight by early fall and this should keep December well supported, even if there is some rain in West Texas over the coming weeks.
Today’s WASDE was quite friendly in regards to current crop US numbers, as production was lowered by 110,000 bales to 20.92 million bales, while exports increased by 500,000 bales to 15.50 million bales. This caused US ending stocks to drop from 5.3 to 4.7 million bales. However, a 0.4 million bales increase in Australian ending stocks and some minor adjustments elsewhere were nearly enough to offset the drop in the US, which means that global ending stocks were basically unchanged at 88.21 million bales vs. 88.29 million last month.
The USDA also gave us its first look at the 2018/19-season, which at appears to be slightly friendly, because global mill demand is expected to outpace production by 4.25 million bales. Global mill use of 125.44 million bales would be a new record, beating the previous record of 123.8 million bales set in 2006/07, when we had nearly a billion people less on the planet.
However, despite the global production gap, ROW ending stocks are expected to rise from 47.51 million bales at the end this season to 50.33 million in 2018/19. That’s because China is expected to supply its production gap of 14.5 million bales partly by further destocking, while imports are pegged at only 7.0 million bales. This potential rise in ROW ending stocks is the most bearish element in today’s WASDE report.
So where do we go from here? Although the technical picture is flashing some warning signs, not much has changed in the standoff between spec longs and trade shorts. Today’s on-call report showed that as of last Friday there were still 5.51 million bales unfixed on July, down just 0.05 million from the week before. Mills are apparently still hoping for specs to cut and run, similar to what happened in mid-May last year.
A case can certainly be made in which the market breaches some important support levels, triggering sell-stops that flushes out a good part of the spec net long position, thereby allowing mills to fix in a falling market. This is what happened a year ago and also in January.
However, with the US basically sold out of cotton, with Texas still waiting for rain and with an increasing number of hedge funds jumping on the inflation/commodities bandwagon, we might just get another quick washout followed by a sharp rebound, similar to what happened on April 4 and again on April 24. Something tells us that the mills will not get out of their trap as easily as last season!
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