NY futures continued to crater this week, with December dropping another 257 points to close at 72.06 cents.
The market has remained under pressure, as the bearish case grows stronger by the week, which in turn emboldens sellers and keeps buyers in hiding.
As we have pointed out last week, the amazing turnaround of the US crop over the last six weeks has changed the marketΆs psychology from cautiously to decidedly bearish. There is now little doubt among traders that ROW inventories are going to increase substantially in the coming season, from the current 38.7 million bales to potentially 44-45 million bales by the end of the 2014/15-season. The USDA has its current estimate at 41.95 million bales.
We are therefore moving from a situation in which China owned too many bales while ROW stocks remained relatively tight to one in which both balance sheets are going to be flush with cotton. The possibility of a 2-3 million bales larger US crop than was expected just a little over a month back has forced growers and merchants to become a lot more aggressive with their hedging strategies.
The latest CFTC report provides an interesting insight in that regard. As of June 24 the trade carried a net short position of just 8.1 million bales net, which compares to a 13.0 million bales net short position a year ago. In other words, we are looking at a US crop that is potentially 5 million bales larger than last season, while the trade has 5 million bales fewer shorts on its book. The trade has clearly been surprised by this sudden reversal of fortune in the US and is now in catch up mode.
This has generated an enormous amount of selling pressure in a market that clearly lacks buying interest at the moment. With a chart that looks like the Niagara Falls, especially the weekly continuation chart, speculators are not interested in owning this market either, other than an occasional short-term momentum trade. There were several occasions recently on which the market spiked off the daily low and showed some promise going into the close, only to get knocked down again in the following session.
US export sales for the week ending June 26 were nothing to excite the market with, amounting to just 101Ά300 running bales. While the cleaning out of current crop inventories continued, with 41Ά500 running bales finding a home in 16 different markets, new crop sales of only 59Ά800 running bales were a clear sign that buyers are in no hurry to book forward business. Shipments were fairly strong at 175Ά100 running bales and remained above the pace needed to make the 10.5 million bales USDA estimate. Total sales for the season now amount to 11.1 million statistical bales, whereof 10.0 million bales have already been exported.
A news story talking about ChinaΆs intention to reduce its massive corn stocks reminded cotton traders that we are in the midst of a fundamental shift in Chinese policy, as the government is now actively trying to reduce its inventories in Ag commodities such as corn, soybeans and cotton after years of accumulating them. Although the pace and extent of this Chinese de-stocking scheme is not known yet, the intent seems clear and we have entered a phase where the burden of holding inventories is shifting back to the rest of the world.
So where do we go from here? The market is still in search of bottom, but so far potential buyers seem to have no fundamental or technical reason to act in support of the market. It is difficult to come up with any meaningful bullish arguments at the moment, although we need to keep an eye on the Indian Monsoon, which has been irregular so far. We also believe that most of the certified stock will get shipped over the next two or three months, which could spook some shorts and give the market a temporary boost. However, as long as the trade remains under-hedged and ready to sell into every bounce that presents itself, the path of least resistance is down.
Best regards
