Market Comments – April 25, 2019

NY futures closed this holiday-shortened week basically unchanged, as July edged up just 5 points to close at 78.32 cents/lb.

July traded in a 199-point range this week, between 77.05 and 79.04 cents, as the market’s sideways flag is now in its sixth week. For the last 25 sessions July has settled in a band of just 212 points, between 76.88 and 79.00 cents, as the trade has been active on both sides of the range, while speculators seem to have moved to the sidelines due to the loss of momentum.

The latest spec/hedge report, which showed futures and options positions as of April 16, confirmed that specs had been inactive, as they added just 0.06 million bales to increase their net long to 2.54 million bales. The trade increased its net short by the exact same amount to 10.13 million bales, while Index Funds remained unchanged at 7.59 million bales.

Spec short covering has so far been the driving force behind the market’s move from the low-70s, as nearly half of the 7.7 million outright spec shorts have so far been bought back. The trade has been a strong scale up seller and more than doubled its net short from 4.8 million to 10.1 million bales since mid-February. The trade will probably continue to put on hedges in new crop, but the need to sell July may no longer be there due to the strong export performance in recent weeks.

US export sales continued to impress last week, as another 299,700 running bales of Upland and Pima cotton found a home in 17 markets, with India taking 80,200 RB. Shipments are still lagging a bit at 329,000 RB, but as long as the sales pile up we are not too worried. Whether we cross 15 million bales in shipments on July 31st or a couple of weeks later won’t make a big difference.

Total commitments for the season have now reached 14.7 million statistical bales, of which a little over 8.8 million bales have so far been exported. Meanwhile sales for the coming marketing year are at 3.1 million statistical bales.

When we add up all existing export commitments plus mill use until October, we come up with a figure of 21.7 million statistical bales, against which we have existing supply of 22.5 million bales (4.3 beginning stocks + 18.2 crop). Some of the 3.1 million bales in new crop export commitments may be for shipment beyond October and would therefore be fulfilled from new crop cotton, but needless to say that supplies are getting rather tight.

This means that July could turn into a dangerous month and detach itself from the rest of the board. Over the last ten years the July/Dec spread traded only 4 times at some carry by the time July entered its notice period, while on the other six occasions we had inversions of up to 8 cents, not even counting the 2011 bull market when the inversion reached over 40 cents. The May notice period was a warning shot in that direction, as the May/July spread didn’t reach full carry like in March and the small certified stock of a little over 60k found ready takers.

The on-call report still showed 3.76 million in unfixed sales as of last Friday, against just 0.6 million in unfixed purchases. These unfixed sales could turn into a problem, since we don’t expect a lot of sell-side liquidity any more from trade hedging or spec selling. With export sales still going strong, we could therefore see July take on a life of its own.

So where do we go from here? The May notice period has established that current crop futures have plenty of support at 7600. For now the market seems to be stuck in a sideways flag, but the risk of a breakout is clearly to the upside in our opinion. US prices are still attractive to overseas buyers and the more we keep adding to the sales tally, the greater the likelihood of July getting squeezed.

If we are right and July gets pushed higher, it should drag December along to some degree. But since new crop promises a lot of supply, we expect hedge selling to force a widening of the July/Dec inversion. Growers should therefore use strength to buy some downside protection via options. 

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