NY futures came under further pressure this week, as December dropped 250 points to close at 74.63 cents.
It was another dismal week for the bulls, as several bearish factors kept buyers on the sidelines and December dropped into a void of buying, falling from a high of 77.89 cents on Monday to a low of 73.72 cents today, before bottom pickers finally started to show up and lifted values about a cent off he lows.
JulyΆs last minute collapse at the end of MondayΆs session seemed to put the market in a funk. Contrary to expectations, it was the longs that bailed out of their positions during the last session before First Notice Day, after the anticipated short squeeze failed to materialize. After rallying until late last week, the spot month slipped more than 10 cents in the last six sessions on long liquidation.
Interestingly though, the rumor mill proved to be accurate, as Glencore and Allenberg emerged as strong takers, while Cargill has been furnishing most of the notices issued. So far there have only 67Ά600 bales been tendered and based on the remaining open interest of 238Ά800 bales we already know that at least a third of the certified stock will not change owners. This combined with the fact that there are two large merchants standing for delivery leads us to believe that most of the certified stock will be applied and shipped over the summer months.
By far the most bearish development over the last four to five weeks has been the phenomenal turnaround of the West Texas crop. After a record-breaking drought the region has recently enjoyed an abundance of moisture, with Lubbock reporting around 8 inches of rain since May 22nd. This has led to a stunning improvement of the US crop, from a potentially disastrous situation to one of considerable promise.
While crop estimates before the rains were trending below 14 million bales, we now believe that the US crop has the potential to yield well over 17 million bales. ThatΆs considerably above the current USDA estimate of 15 million bales, which is behind the curve due to a 34% percent abandonment figure for the US Southwest. This number is clearly too pessimistic at this point and will no doubt have to be lowered in subsequent reports. For example, during ΅wet yearsΆ like 2007 and 2010 we had abandonment figures in the low single digits!
If we do a quick back-of-the-envelope calculation, figuring planted US acreage at 11.1 million acres and subtracting a US wide 10% abandonment rate, we arrive at around 10.0 million harvested acres. Based on a yield of 850 pounds, we would get at a US crop of 17.7 million bales. Granted, this number represents nothing more than ΅potentialΆ at this point, but if favorable weather conditions were to continue, it could certainly become a reality. By the way, in 2012/13 the US crop yielded 887 pounds, which means that a yield of 850 pounds is certainly within reach.
We feel that the market is starting to factor in the potential for a US bumper crop, which could add 2-3 million bales to the ROW balance sheet. In its June report the USDA predicted that the ROW surplus would exceed Chinese imports by 2.63 million bales next season, but we might see this number grow to 5 or 6 million bales, especially if China continues to slow down yarn imports, which has a negative impact on mill use in India, Pakistan and Vietnam.
Chinese yarn imports of 131Ά639 tons were at their lowest level in eleven months and we believe that this trend will continue as Chinese mills are becoming more competitive thanks to the steep drop in local prices.
US export sales slowed down considerably last week, as net sales amounted to just 4Ά600 running bales of Upland and Pima for June/July shipment and 24Ά100 running bales for August onwards. Shipments of 138Ά100 running bales maintained the pace needed to make the current USDA estimate of 10.5 million bales and reduced the amount of outstanding commitments to just around 1.2 million statistical bales. Regardless of how depressed the market may feel at the moment, the current US balance sheet is one of the tightest we have seen and we still believe that just about every last bale of current crop will be shipped or consumed by the time new crop gets off the fields.
So where do we go from here? Given the rising production surplus in the ROW, we should expect further pressure on prices as we head into next season. However, December has dropped about ten cents since early May and momentum indicators are flashing oversold conditions, which means that the market may have discounted enough bearish news for now and could get ready for a bounce. TodayΆs price action formed a ΅hammerΆ pattern on the candlestick chart, which is a sign that buyers are starting to take control of the market after a sharp down move. If prices were to show some strength tomorrow, it would indicate that an up move is under way. We donΆt think that a rebound would carry very far, since there are plenty of traders waiting of a chance to sell the market at higher levels, but it would at least stop the bleeding for now and hopefully bring some mill buyers back into the fray.
