Market Comments – May 3, 2018

NY futures moved slightly higher this week, as July gained 33 points to settle at 84.50 cents. 

July closed the last five sessions in a very narrow window of just 84 points, as the standoff between spec longs and mills continues. Trading volume was relatively low, but somewhat surprisingly we saw July open interest increase by 3,482 contracts to 138,310 contracts (13.83 million bales) since last Thursday, at a time when positions should be getting closed out. 

As today’s CFTC on-call report showed, there were still 55,554 contracts unfixed on July as of last Friday, down just 44 lots from the week before, and the increase in open interest suggests that no progress has been made this week either. In other words, another two weeks have gone by and mills are still waiting and hoping for something to get them out of trouble.

Meanwhile, US export sales continue to boost bullish sentiment, as another 500,000 running bales of Upland and Pima were added for both marketing years last week. There were still 18 markets buying, while 26 destinations received shipments of 444,900 running bales. Commitments for the current marketing year - with still 13.7 weeks to go - are at over 16.9 million statistical bales, whereas sales for August onwards are already at 3.8 million running bales. So far there have been 10.45 million statistical bales shipped this season. 

There are now 20.25 million statistical bales committed for the current marketing year, including 3.35 million bales that are going to domestic mills, out of a crop of around  21.0 million. In addition to that we had 2.75 million bales in beginning stocks, but with export commitments for August onwards at 3.8 million bales and with domestic needs of 0.8-0.9 million bales between August and October, it is easy to see why the statistical picture is about as tight as it has ever been in early May. 

This is why the market is getting increasingly nervous about the persistent drought in West Texas, where nearly the entire panhandle is reported to be in a “severe to exceptional drought”. Lubbock has received only 1.10 inches of rain since the beginning of the year, which compares to nearly 5 inches a year ago. There is still time to turn the situation around and a few inches over the next 4-5 weeks would certainly get things going, but we feel that even with some rain we won’t see another bumper crop like in the previous two seasons. 

Trade shorts, which for the most part consist of positions against on-call sales, are still hoping for something to spook the spec longs into selling, be it rain in West Texas, cancellations of export sales or perhaps some renewed turmoil in the world’s financial markets. However, time is starting to run short since there are only about six weeks left to get all these fixations and other short positions squared away. 

Unlike last season, when commodities were still downtrodden in the investment world, we now have prominent outfits like Goldman Sachs beating the bullish drums, stating this week that “the strategic case for owning commodities has rarely been stronger”.  

This reinforces our belief that specs will not give up on their net long position like they did last season, but that most of them will opt to roll their longs to December. This would be problematic for the many trade shorts that remain, because they need net selling in order for them to get out. 

So where do we go from here? Another week has gone by and we are still confronted with the same problem, only a little bigger since open interest has been going up. The shorts may continue to hold off for another week or two in the hope that spec longs will blink first, but they are playing with fire!

The longer they wait, the more they will ultimately have to cover in a short amount of time, which sets the stage for a blow-off move. We continue to favor higher prices in July, while December depends on whether rain arrives in time to avert a large drop in planted acreage. 

 

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