Market comments – July 26, 2018

NY futures continued to trade sideways this week, as December moved up 68 points to close at 88.23 cents.

Since its limit-up move to 88.54 cents two weeks ago, December has settled the following ten sessions in a very tight range, between 86.70 and 88.34 cents. The average daily trading volume continued to be lackluster at just over 15k, while open interest of 259k is just marginally higher than a week ago.

In other words the waiting game continues, as the trade remains unwilling to pay up in order to get out of its short, while speculators continue to hold on to their net long position. Sooner or later something will have to give, but it is still anybody’s as to what will set the next big move in motion.

The bulls were hoping that the heat wave in West Texas, the 12 billion dollars in farm aid or positive trade talks between the US and EU would generate some new upside momentum, but the low volume and steady open interest tell us that traders aren’t biting.

There was yet another news story this week about West Texas cotton ‘burning up’, but these stories are trying to kill the same acres over and over again. We already know that probably 80 percent of the dryland crop in West Texas will either get cancelled out or won’t produce much. The USDA has therefore adjusted its harvested acreage to 10.5 million acres in its last report, down from a planted acreage number of 13.5 million acres.

Most of the irrigated crop is still hanging in there and some pockets are actually in decent shape. Furthermore the weather pattern going forward looks a lot more favorable, with a cold front dropping temps into the 80s next week and with the 6-week forecast calling for cooler than normal weather, with increased odds for rain. In other words, the heat wave seems to be over for now and the surviving acreage will have a chance to improve.

US export sales were about as expected at 251,600 running bales net for all three marketing years, but shipments continued to lag at 311,800 running bales, which is not enough to make the USDA target of 16.2 million bales. For the current season we have commitments at 17.5 million statistical bales, of which 15.4 million bales have so far been exported, with 12 days of data to go. We estimate that the final export number for the 2017/18-season will be around 16.0 million statistical bales.

However, it doesn’t really matter whether we ship some of these commitments before the end of July or in early August. If 16.0 million bales get shipped by July 31, it means that 1.5 million bales will be carried into next season and are added to the 7.0 million bales in export commitments that are currently on the books for 2018/19. In other words, we would start the new season with export commitments of around 8.5 million statistical bales, plus whatever is sold between July 20-31.

When we further add the 3.4 million bales that US domestic mills will be using, we get to around 12 million bales in commitments on August 1 vs. a potential supply of around 22.5-23.0 million bales (stocks + crop) next season. No wonder the market is so nervous about the crop development!

While most factors seem to point to higher prices next season, such as continuous strong mill demand, declining global ending stocks, 15.3 million bales in unfixed on-call sales and inflation fears, we always need to be on the lookout for potential stumbling blocks.

The main worry in our opinion is a global economic slowdown or recession. Thanks to Central Bankers around the globe increasing their balance sheets from USD 3 trillion to around USD 15 trillion over the last ten years and by keeping interest rates historically low, financial assets like stocks, bonds and real estate have been allowed to grow into the sky. But with interest rates rising, this goldilocks economy is starting to face headwinds.

We need to look no further than the 1-year LIBOR rate, which has shot up to 2.8% from a low of around 0.55% in 2014. A lot of floating debt, like adjustable-rate mortgages, consumer loans and trillions in derivatives are based on LIBOR. This rise in short-term interest rates is starting to cause some real pain in many debt-laden economies. The day of reckoning might still be several months down the road, but once the tide turns, it could be swift and brutal. Just look at Facebook, which after slightly disappointing earnings saw USD 130 billions of its market cap wiped out in a matter of hours yesterday. And none of the top analysts saw it coming!

So where do we go from here? Not much has changed since last week, as most traders remain sidelined. Mills are still hoping for another dip into the low-to-mid 80s to get some of their fixations squared away and are therefore not in any hurry to chase prices higher. Speculators are not active either in this dull market and are waiting for new momentum before jumping back into action.

The main theme from a fundamental point of view is that global stocks will finally be back to normal levels in 2019, which will make the market more sensitive to seasonal supply/demand dynamics. Considering that it will take record global production to keep pace with the anticipated 127 million bales in mill demand, there is little margin for error on the supply side. Many traders therefore feel that we are just one hiccup away from another major rally. However, until such a widening supply gap becomes reality, the market is likely to remain range bound. 

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