NY futures ended an active week nearly unchanged, as December closed just 17 points higher at 92.96.
Despite average daily trading volume of around 64k futures, the market was unable to generate any momentum. Although both July and December managed to reach new contract highs, they settled the last five sessions in tight ranges of 180 and 128 points, respectively.
That’s quite remarkable, since neither the WASDE report, the Index Fund roll, China’s import quota announcement nor another strong US export sales report were able to inject new life into the market. Most of the action seemed to be confined to rolling July positions into December, with specs and index funds staying invested on the long side, while the trade was willing - and able - to keep pace on the short side.
As a result we saw overall open interest drop only slightly, as it still measured nearly 311k as of this morning. That’s down just 11k from last week, despite July liquidating more than 45k contracts. July shorts - many tied to mill fixations - were apparently not ready to surrender and are taking their fight into December. As of last Friday there were still 16.02 million bales to be fixed overall, of which 2.58 million belonged to July.
Due to this epic fixation struggle and much higher than normal forward contracting, new crop open interest has reached never before seen proportions At the start of today’s session there were 266,414 contracts or 26.64 million bales open in December and beyond. The previous record for this date dates back to 2008, when 19.75 million bales were open, while a year ago we had 18.91 million bales.
Tuesday’s WASDE report didn’t provide the market with anything new and exciting. Higher US exports and a corresponding drop in US ending stocks were already discounted, while the USDA still refuses to address “phantom stocks” in China and the Indian Subcontinent. If ending stocks were indeed at 41.17 million bales in China and at a record 47.04 million bales in the ROW at the end of this season, then we wouldn’t have seen prices shoot up 25-30 cents in both markets.
The USDA sees ROW stocks climb even higher next season, to a record 49.90 million bales by July 2019. We feel that this number is going to end up substantially lower, for several reasons. Firstly, we believe that beginning stocks in India and Pakistan are around 4.5 million bales overstated. Secondly, China will probably import more than 7.0 million bales next season. Our guess is that imports will be closer to 9.0 million bales given the additional import quota of 800k tons.
Thirdly, the ROW production estimate of 93.9 million bales for coming season seems optimistic. This season there were 95.26 million bales produced thanks to bumper crops in many origins, while last season we had a much lower 83.88 million bales. Given the difficult start in several areas around the globe, we don’t see another bumper crop in the making at this point.
US export sales of 350,300 running bales of Upland and Pima cotton for all three marketing years were once again quite strong, with 18 markets participating. Shipments of 469,200 running bales to 27 destinations were above the pace needed to make the revised export target of 16.0 million statistical bales.
Total commitments for the current season are now at 17.5 million statistical bales, of which 13.4 million bales have so far been exported. For the coming marketing year there are already nearly 5.1 million statistical bales on the books, while there are an additional 1.0 million bales in commitments for the 2019/20-season.
So where do we go from here? Last week we had our doubts as to the trade’s financial ability to increase its short position further, but so far trade has been determined to keep the fight going.
With the July liquidation just about over, we feel that there will be a lack of buying over the coming weeks, barring any new problems on the production front. Trade shorts are not in any hurry to fix December in the low 90s, while speculators are not likely to extend their already massive long position based on how the market has been acting lately. This might lead to a deeper pullback into the mid-to-high 80s, where we expect strong scale down trade buying to provide solid support.
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