NY futures crashed through support this week, as December dropped 417 points to close at 63.08 cents.
After spending the last eight weeks in a 6450-6850 sideways range, the market somewhat unexpectedly dropped to its lowest level in three years. A falling futures market in China, rumors of high-priced contracts being renegotiated or reneged and weak technicals may have triggered this latest decline, but from a big picture point of view it has really been the increasingly bearish balance sheet and a lack of any substantial buying in the market that has been forcing prices down.
Today’s WASDE report confirmed the bearish trend, as it showed a substantial 3.16 million bales rise in global ending stocks to 80.42 million bales. When we break this increase down by countries, we see that China is supposed to see its stocks grow by 1.5 million bales, India by 1.35 million bales and the US by 0.30 million bales, while in all other countries combined ending stocks remain basically unchanged (+0.01 million bales).
Since China and India both operate on higher price plateaus than other origins, there seems to be no threat of stocks from these countries hitting the international market. However, we believe that the US inventory could potentially grow a lot more than the 0.30 million bales the USDA suggests. Most private estimates now have the US crop at over 23.0 million bales, owing to the great summer weather that has prevailed over the last few weeks. We also believe that an export target of 17.0 million bales is rather optimistic and that even exporting 15.50 million bales might be a challenge.
In other words, if the US crop came in 1.0 million bales over the USDA estimate and exports were 1.5 million bales smaller than predicted, then US ending stocks would balloon to 9.2 million bales, which would amount to a season-to-season increase of 4.2 million bales. For the last twelve years US ending stocks have ranged from 2.35 to 6.70 million bales, so a 9+ million bales ending stocks number would be hard to digest for the market.
Another bearish aspect of the report was the downward revision in mill use, both for the current season (-1.24 million bales) as well as next marketing year (-1.00 million bales). While these revisions are pointing in the right direction, we feel that there is still more room to the downside. For example, for the current marketing year the USDA has lowered mill use to 121.1 million bales, which is probably close to reality, but then it expects demand to jump to 124.3 million bales next season. We don’t believe that’s realistic based on the information we have been getting from mills lately and considering that the global economy is slowing down.
Against this bearish supply/demand backdrop there are simply not many willing or able buyers around, which is needed to halt this relentless slide in the market. According to the latest CFTC report of July 2nd, the trade was just 2.4 million bales net short vs. 16.6 million bales a year ago. In other words, the trade remains severely under-hedged and it therefore can’t afford to buy the market at this point. Index funds are already long and their position only changes because of money flowing in and out of commodity baskets or because of rebalancing.
This leaves only speculators as a potential source of buying, but with the market resuming its downtrend this week after a two-month break, there is currently no reason for specs to cover their shorts and to go long. For that to happen we need a bullish event that changes the specs' outlook on the market.
As pointed out before, it would take something like a trade deal between the US and China, a major crop problem or a weakening US dollar to bring about a change in market sentiment and none of these potential triggers seem imminent.
US export sales remained slow last week, with commitments of Upland and Pima cotton increasing by 97,100 running bales net for all three marketing years. Shipments continued to lag at 344,000 running bales, which is the reason why the USDA lowered its export target for the current season to 14.5 million statistical bales.
Total commitments for the current season are now at 16.5 million statistical bales, of which 12.9 million bales have so far been exported. Sales for the next marketing year have reached around 4.25 million statistical bales so far.
So where do we go from here? The market broke out of a sideways move this week and resumed its downtrend, which had its origin 13 months ago. Since reaching a top of around 96 cents in June 2018 the market has dropped 33 cents and there is still no end to this slide in sight.
As pointed out above the market is currently devoid of any substantial buying, because the trade needs to go short, not long, while speculators continue to ride a record net short position lower as long as the trend remains their friend. Since the market is missing buy-side liquidity, even a small sell order has the power to force prices considerably lower.
We therefore feel that unless some bullish factors come into play soon, the market could drift another 500 points lower to around 58 cents. At that point loan considerations will come into play, since the AWP, which currently calculates at a daily rate of around 57 cents, would most likely have reached the loan level and provide some support.
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