NY futures retreated this week, as December gave back 157 points to close at 87.26 cents.
Not much has changed this week, as December continued to move sideways within an 86-90 cents trading range that has now been in force for the last 21 sessions. On a closing basis the range is even tighter, as December has closed no lower than 86.70 and no higher than 89.59 cents since July 12.
Average daily trading volume picked up a bit this week, which was mostly due to increased spreading activity, as it was rumored that some index funds were already rolling December longs to March. There seems to be some validity to this, since the Dec/March spread moved from 8 points ‘over’ to 43 points ‘under’ March since last Thursday. Also, December open interest dropped by 4,594 contracts over the last five sessions, while March open interest increased by 5,485 lots. Total open interest rose from 26.99 to 27.22 million bales and remains historically high.
US exports sales of 276,200 running bales for all three marketing years were once again quite decent last week. Shipments picked up a bit at 315,900 running bales. The final tally for 2017/18 exports is at roughly 15.9 million statistical bales, which would be 0.3 million bales short of the latest USDA number.
There were about 1.6 million statistical bales carried into the current marketing year, which brings total commitments for the 2018/19-season to 8.7 million statistical bales. That’s the highest amount of export commitments at the beginning of any season and quite a bit ahead of the previous record, which was at 6.8 million bales in 2011/12. Additionally there are already around 1.35 million statistical bales sold for the 2019/20 marketing year.
Assuming that supply is going to amount to 22.5-23.0 million statistical bales (stocks + crop), there are already around 60% of this supply committed, counting 8.7 million bales in export commitments, 3.4 million bales in domestic mill use, plus whatever is needed from these supplies during the August-October 2019 time frame. In other words, the US is in a very comfortable position in regards to its forward sales and shippers are probably reluctant to push additional business until the size and quality of the crop is established.
Tomorrow’s WASDE report has the potential to move the market either way. We expect the US numbers to be slightly bearish, because ending stocks are going to be higher and the crop seems to be better than 18.5 million bales. Tomorrow’s report will give us the first state-by-state breakdown and our crop estimate is currently at 19.25 million bales. Let’s not forget that the USDA has already cancelled out most of the Texas dryland and the irrigated acreage is doing relatively well, especially with the somewhat cooler and wetter conditions that have arrived this week.
The global balance sheet should be slightly friendly overall. Australia is experiencing a severe drought and local estimates of 2.3 million bales are not anywhere near the 3.7 million bales the USDA guessed in July. Mill demand seems to remain solid and this has been the strongest factor behind the market’s strength since last October. Furthermore, we still feel that global stocks are still overstated, especially in the Indian Subcontinent, although we don’t know how long it will take before the USDA finally adjusts its numbers.
So where do we go from here? Improved conditions in West Texas and the US/China trade standoff have weighed on the market this week, but the slightly higher open interest suggests that it wasn’t liquidation that forced prices lower. Instead it was probably an absence of buying that allowed the market drift south, as the 15.6 million in unfixed on-call sales (5.2 million in December alone) are still adopting a wait-and-see attitude.
Although tomorrow’s WASDE could lead to a knee-jerk reaction if the US numbers come in more bearish than expected, we feel that unless there is a change to the global demand outlook (recession, escalation of trade conflict), any dips into the mid-80s will be well supported by fixation buying and other short-covering. It would take a flush-out of spec longs to turn this market on its head and we don’t see that happening right now.
As long as the major crops are doing relatively well there is equally no reason for the market to lift off. We therefore feel that the most likely course of action is a continuation of the sideways trend, somewhere between 85 and 90 cents.
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