NY futures ended a roller-coaster week slightly higher, with July gaining 57 points to close at 93.72 cents.
After July’s blow-off move to a contract high of 96.40 cents last week, the market was ripe for a correction that saw the spot month drop 705 points to a low of 89.35 cents, before the bulls took over the reins again yesterday. While there was a lot of churning of positions as the market came off, there was hardly any net liquidation, which means that speculators were obviously not fazed by the pullback.
In fact, yesterday’s open interest of 321,683 contracts, or 31.17 million bales, was 0.89 million bales higher than on May 30, when the contract highs were made. It is also just shy of the record open interest that was set on Monday, when 322,253, or 32.23 million bales were open.
While July is in liquidation mode and had only 8.94 million bales open before today’s session, December open interest continued to climb day after day and has already reached 17.77 million bales. By comparison, last season there were 13.64 million bales open on this date, while two years ago it was 11.31 million bales.
The story is even more compelling when we look at the total open interest for December and beyond. As of this morning there were 23.23 million bales open from December onwards, which is 6.78 million bales more than last year and 9.61 million bales more than two seasons ago.
In other words, speculators have remained committed to the long side and used the recent break to add even more longs. The latest CFTC report showed that as of May 29 specs had a 12.24 million bales net long, but open interest has gone up since then, which means that by now the spec net long is probably in record territory at around 13.0 million bales.
Of interest is also that there were 181 large spec accounts on the long side, up from 90 accounts back in November. In other words, the amount of large spec traders has doubled since this bull market began and is drawing more and more spec players into the market. This is the 3rd highest spec involvement after January and March 2008.
Meanwhile the trade continued to expand its net short position to 19.98 million bales, with the outright short amounting to 28.15 million bales. As explained last week, the trade needs to keep an eye on margin calls, since a 200-point move translates into 281.5 million dollars. A lot of these shorts are unsecured, since they are against unfixed on-call sales and/or new crop purchases, for which bales don’t even exist yet. This may make it more difficult to secure additional funding for margin calls.
Index funds were 7.75 million bales net long and today marked the first day of the 5-day Goldman Sachs roll period. This means that index funds are selling their July longs and are buying December longs instead. While we can easily see trade shorts absorbing the Julys that index funds have to sell, we wonder who is going to provide the sell-side liquidity in December?
The trade is already quite short in new crop futures and we cannot envision them adding another 7-8 million bales in just a few sessions, while speculators go with the trend and have no incentive to part with their profitable longs at the moment. This may help to explain the upward pressure we have seen in the market today.
Despite last week’s higher prices US export sales continued to grow, as net new sales of Upland and Pima cotton for all marketing years increased by 281,500 running bales. Sales amounted to 20,000 bales for the current season, 121,300 bales for next season and 140,200 bales for the 2019/20 marketing year.
Participation was a little less widespread with only 15 markets buying, but there were no less than 29 destinations receiving shipments of 584,800 running bales, which is a marketing year high. For the current season we now have total commitments of 17.3 million statistical bales, of which 12.8 million bales have so far been exported. Shipments will have to average only a little over 300k bales in order to reach the current USDA target of 15.5 million statistical bales.
For the coming season there are currently 4.8 million statistical bales on the books, and in addition to that there are already over 0.9 million bales committed for the 2019/20-season. This is rather unusual, as we rarely see more than 0.1-0.2 million bales for the ‘third’ marketing year at this point in time.
So where do we go from here? The speculative net long position continues to grow and is probably at a new record at this point. The trade net short, as well as the outright short position, are also approaching record levels, second only to the spring of 2008, just before the market went parabolic.
If spec longs continue to hold their ground and the market pushes higher, then there will come a point at which some of these trade shorts will no longer be able to stay in their positions and are forced to cover. We don’t know where exactly this trigger point is, but it might only be a few cents above the market. In other words, this is now as much about money as it is about cotton!
Since it will be a long five months until the December delivery period, the trade doesn’t really have any trump cards against the specs over the coming months, other than hoping for some bearish news to scare them out of their longs. Unfortunately the trade has painted itself into a corner by amassing over 16 million bales in unfixed on-call sales, of which there were still 3.47 million on July as of last Friday. This is a dangerous time to be short!
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