NY futures continued to slip this week, as December dropped 131 points to close at 61.71 cents.
In the absence of any bullish news the market continued to drift lower in low daily volume of just 16-20k contracts. However, as pointed out last week, it doesn’t take much to force prices lower due to the lack of buy-side liquidity. Over the last three months December has now lost nearly 16 cents and it still doesn’t feel like we are near a bottom yet.
The CFTC report showed that it was once again the speculators who pushed the market out of an 8-week sideways range last week. During the week of July 3-9, speculators sold 0.92 million bales net and thereby increased their net short to a record 4.82 million bales. Index funds were also net sellers, as they cut their net long by 0.37 million to 5.93 million bales.
On the other hand the trade bought 1.29 million bales net and reduced its net short to just 1.11 million bales. This is the smallest net short position we could find since at least 2006, where the current CFTC reports started. What’s interesting is that it was almost entirely new longs and not short-covering that caused this reduction. The trade owned outright longs of 7.05 million bales vs. outright shorts of 8.15 million bales as of July 9.
US export sales were actually not that bad at 268,100 running bales net, but the market reacted with disappointment to shipments of just 321,700 RB, which were over 100k short of the pace needed to reach the current USDA estimate of 14.5 million bales. With less than three weeks of data left, it seems that US exports will reach no more than 14.2-14.3 million bales, which would increase the US carryout to 5.2-5.3 million bales.
Total commitments for the current season now amount to 16.5 million statistical bales, of which 13.25 million bales have so far been shipped. Sales for the coming marketing year are at around 4.5 million bales. The US balance sheet looks actually fairly tight at this point, since we have 21.0 million in export commitments + 3.9 million in domestic mill use through October, which gives us a sales total of 24.9 million bales. Against that we have existing supply at just 22.7 million bales (beginning stocks + crop).
However, the market is forward looking and traders not only see a big US crop coming a few months down the road, but apparently some export commitments may not get honored after this steep drop in the market. There has been a lot of talk about the non-performance of contracts and/or delays in shipments in several Asian markets.
In other words, there is nothing inspiring about the current market and traders are still looking for game changers. Apart from crop issues later in the season or a surprise trade deal between the US and China, a weaker US dollar would be the only other potentially bullish factor we can think of.
While the US crop is doing well at the moment, with 56% rated in the good and excellent categories, we shouldn’t lose sight of the fact that the crop is generally late and therefore more susceptible than usual to adverse weather in the fall, be it from an early cold snap or rain at harvest. Some meteorologists have already been issuing warnings in that regard, as some models suggest that this hot summer weather will eventually give way to an earlier than normal fall. Definitely something to keep an eye on, even though the market doesn’t seem too concerned at this point.
Some analysts believe that the upcoming Fed meeting at the end of the month will lead to a rate cut of at least 0.25 basis points and thereby weaken the US dollar. We are not in that camp and feel that the US dollar will remain strong vis-à-vis other major currencies and especially against emerging market currencies who are struggling to service their external debt.
So where do we go from here? Not much has changed since last week, as speculators remain in control of the market with their nearly 5 million bales net short position. The trade is basically unhedged on a net basis and is waiting, or rather hoping, for rallies to provide it with an opportunity to put on additional protection.
However, unless there is a pertinent bullish factor entering the scene, there seems to be no reason for speculators to abandon their bearish stance, which means that the market will probably continue to drift lower, with 58 cents being the next target.
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