NY futures held steady this week, as July edged up 14 points to close at 85.62 cents, while December gained 45 points to close at 77.83 cents.
Since falling over a precipice three weeks ago, with December trading to a low of 7700 on May 28, the market has managed to flag sideways over the last eleven sessions. Although December briefly dipped below this triangle formation on Wednesday, it quickly recovered and then followed up with a strong showing today. Recent price action therefore suggests that December has found an area of strong support, as it has settled the last eleven sessions in a tight range of just 119 points, between 77.19 and 78.38 cents.
Just when it looked like December was getting ready for another leg down, the USDA helped the battered bulls out with a supply/demand report that was less bearish than the consensus estimate. The main feature was US crop production, which was raised by just 0.5 million bales to 15.0 million bales. The USDA is clearly taking a measured approach in regards to the potential this US crop holds after the recent rains in West Texas, as most trade estimates are at least a million bales higher at this point. Unless there is going to be a major setback, the USDA will eventually have to add to their US crop number over the coming months.
As expected the USDA raised Chinese imports for the current season from 12.75 million bales to 13.5 million bales. This means that Chinese imports will once again outpace the ROW production surplus of 11.81 million bales. Last season we had a similar situation when Chinese imports of 20.33 million bales were higher than the ROW surplus of 17.18 million bales.
The 2014/15-season is expected to break this trend, as Chinese imports of an estimated 8.0 million bales will be no match for a ROW production surplus of 11.13 million bales. This in turn is expected to boost ROW ending stocks from 38.69 to 41.95 million bales, and this number could increase further if the US crop were to realize its potential.
It is this shift from very tight ROW stocks to a more ample inventory scenario that has traders and specs on the defensive. However, as we have pointed out before, there is still along way to go before any such bearish scenario can play out, as the crops are not made yet and the market does have a tendency of underestimating Chinese imports.
US export sales for the week ending June 5 were about as expected, with net new sales of 42Ά500 running bales for June/July shipment and 74Ά700 running bales for August onwards. WhatΆs remarkable is that 22 different markets shared this small amount of new sales! This indicates to us that there is still a lot of buying interest for nearby shipment and that these relatively low export sales are more a function of limited availability than a lack of willing buyers.
Total commitments for the current season have now reached 10.8 million statistical bales, of which 9.5 million bales have so far been shipped. The USDA just upped its export target for the current season to 10.5 million bales, which implies shipments of another million statistical bales over the remaining eight weeks. This should be an easy target to reach given that current shipments are still at around 200Ά000 statistical bales a week.
As far as 2014/15 exports are concerned, the USDA has set the bar rather low with its 9.7-million bale estimate, considering that existing commitments already amount to 2.4 million statistical bales. This export estimate will likely be revised upward over the coming months, along with the US crop number.
So where do we go from here? LetΆs talk about July first! Even though the liquidation of the spot month has been very orderly thus far, there could still be some life left in this expiring contract. With the index fund roll period and options expiration out of the way tomorrow, it will be interesting to see how many longs and shorts remain in the game when the dust clears next week. We expect open interest to amount to no more than 15-20K contracts, but that would still be enough to create some last minute fireworks. We have no clue how this poker game between merchants will end, but if we had to play in it, then only from the long side. The worst thing that can happen to a long at this point is that he has to pay for some certified cotton in the mid 80s, while any short that doesnΆt have cotton to back it up is asking for a lot of trouble.
New crop futures follow a different set of dynamics, with rising ROW stocks likely to keep a lid on the market. The improved situation in West Texas has bolstered the bearish case to a great extent, since a larger US crop implies that about half of the ROW stock growth will occur in the US. In other words, if ROW stocks were to rise by letΆs say 4 million bales to 43 million bales, then US stocks would probably increase by nearly 2 million bales to around 4.5 million.
However, as we have pointed out before, these stocks will only gradually build into the ROW balance sheet over the course of next season and we therefore have some reservations about being short December, since it may first need to ΅buyΆ itself some certified stock, which wonΆt be that easy at the beginning of harvest if prices are too depressed. We therefore feel that March is the better short to play these new crop dynamics with and for carry to be forced back into the market.
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