NY futures continued to slide this week, as July lost another 269 points to close at 90.36 cents, while December dropped 89 points to close at 82.62 cents.
It was a combination of technical weakness and economic worries that weighed on the market this week, as the spot month moved perilously close to the important 90 cents support level, settling at its lowest level since March 13.
From a technical point of view, we had a negative crossover of the 7-day vs. the 21-day Exponential Moving Averages earlier this week, which over the years has served as a reliable timing tool for getting in and out of positions. This is the first crossover since early December, when this measure gave us a buy signal that remained in force until this week. A look at the candlestick chart shows that sellers are now firmly in control and threaten to push the market through the 90 cents support level, which would likely trigger additional sell stops.
After several months of positive money flows into the commodity complex, fund managers have started to pull some money off the table, according to the latest CFTC report. Net long positions in Futures and Options across 13 agricultural commodities saw their biggest drop in seven months and the outflow seemed to continue this week. Better crop prospects and a dismal economic outlook for China and Europe were among the reasons cited for this ΅risk offΆ move by hedge funds.
However, not all commodities saw their speculative net long positions reduced, among them cotton, where specs increased their net long by 0.56 million to 6.34 million bales during the week of May 6. The trade was on the other side adding 0.59 million bales to its net short position, which amounted to 12.77 million bales, of which around 6.8 million bales were in July according to the ΅disaggregatedΆ CFTC report. Although overall open interest has declined by about 3Ά000 lots since May 6, there hasnΆt been any widespread spec exodus just yet, although some of them have started to roll their longs from July to December, which is putting pressure on the inversion.
Last FridayΆs USDA supply/demand report contained no major surprises, which is why the market had such a muted reaction to it. The story remains more or less the same as in the previous 3 seasons, i.e. a production surplus in the ROW, with Chinese imports absorbing most of it.
Interestingly, ROW production and mill use numbers for 2014/15 are nearly identical to this season, with ROW production at 85.96 million (versus 85.13 million) and mill use at 74.83 (versus 73.88 million), resulting in a surplus of 11.13 million (versus 11.25 million this season). The main difference is the lower expectation for Chinese imports, which are estimated at 8.5 million bales in 2014/15, compared to 12.75 million this season. This should allow ROW stocks to recover slightly, from a relatively tight 38.35 million bales inventory to a more ample 41.15 million bales by the end of next season.
A lot needs to go right for ROW production to reach nearly 86 million bales in the coming season, since there are at least three trouble spots that could easily trip this estimate up. While we feel that a US crop of 14.5 million bales is a good starting point, the exceptional drought in West Texas could drop this number below 14 million bales. There is still time for the situation to change for the better as there is finally some rain in the forecast for the next couple of weeks, but a thunderstorm or two wonΆt be enough to break the drought.
Another trouble spot is Australia, where the USDA expects a crop of 3.1 million in next season. Given the current water situation we feel that this number is at least 1.0 million bales too optimistic. However, like in the case of Texas there is still time to fill the reservoirs, although the odds are not great with an El Niño in the making.
Then there is India, where meteorologists are worried about a sub-par monsoon due to unfavorable wind patterns stemming from the onset of El Niño and volcanic debris from Mount Kelud in Indonesia. The USDA has the Indian crop at 36.5 million local bales next season or at more or less the same amount as this season, which too may prove to be on the high side.
US export sales for the week ending on May 8 were about as expected at 36Ά400 running bales net for May/July shipment and 12Ά600 running bales for August onwards. There were still no cancellations to speak of and shipments continued to surprise positively with another 228Ά400 running bales leaving the country. Total commitments are now at 10.2 million statistical bales, whereof 8.7 have already been exported. Given the current pace of shipments it is quite likely that we will reach the revised US export estimate of 10.4 million bales by the end of July.
So where do we go from here? The chart doesnΆt look too healthy at the moment, as July is threatening to break below the 90 cents support area, which would likely trigger spec long liquidation and/or rolling of positions to December. However, there should be plenty of trade shorts waiting in the wings, ready to absorb anything the specs throw at them. We may therefore see some choppy trading action in the days ahead. Since there are about twice as many trade shorts as there are spec longs, we expect the market to hold any selloff in the 87-89 cents range. The index fund roll, which will provide additional liquidity on the sell side, is still about three weeks away.
If July manages to hold support at 90 cents and rebounds, then the shorts have a problem and will probably start to chase values higher. The next few sessions should tell us which move is in play.
We still like December at 82 cents, although the prospect of rain in West Texas may lead to additional near term selling, but with an empty pipeline and a US crop that is getting planted late, we donΆt want to be short December in the low 80s and prefer to place any bearish hedges in March instead.
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