NY futures closed once again mixed this week, but this time it was July that dropped 462 points to close at 151.03 cents, while December rallied 838 points to close at 127.57 cents.
After the July/Dec inversion grew from less than 21 cents to over 38 cents a week ago, it has once again started to come in, closing today at less than 24 cents. Although the unwinding of a massive 10 million bales spread position belonging to large speculators may have been the driving force in the July/Dec spread lately, fundamentals are confirming the narrowing of the spread.
It seems as if we were dealing with two different markets at the moment! On the one hand there is current crop, which feels heavy, with delays, cancellations and high-priced inventories weighing on it. On the other hand there is new crop, which is getting a lot of support due to the uncertainty in some key growing areas after a less than ideal start.
Today’s bearish US export sales report seemed to take the wind out of the bulls’ sails, as cancellations of 62’300 running bales more than offset new sales of 29’300 bales for current crop and 21’800 bales for next marketing year. Shipments of 285’700 running bales were slower than usual as well and it will be interesting to see how many of the outstanding 3.1 million bales in commitments will ultimately be exported by the end of July.
De-certifications, which managed to scare some July shorts into covering last week, only showed up in small numbers this week. This leaves the certified stock at around 188’000 bales for now, with some 5’000 bales ‘under review’. At this point it is anybody’s guess what the owner of the certified stock is going to do with it. Some say that it will be shipped against existing commitments, while others feel that will be put against the July contract. Based on how sluggish the physical market feels at the moment, the second option seems to make more sense to us.
West Texas continues to wait for rain and most of the area is now classified as being in ‘extreme drought’ after seven months of hardly any precipitation. Lubbock has received just 1.1 inches of rain since the beginning of the year, which compares to a normal reading of 5.03 inches and last year’s abundant rainfall of 11.50 inches at this date. To make matters worse, the average temperature in April was 5 degrees Fahrenheit above normal in Lubbock, which combined with high winds has dried out the soil two to three feet deep. According to the National Weather Service the current drought ranks near the worst in the region’s history.
However, there is still hope as the forecast calls for a change in the weather pattern this weekend, with the dryline starting to move west towards the New Mexico border. This should allow some moisture to infiltrate the area, which is expected to lead to thunderstorm activity between Sunday and Tuesday. It wouldn’t be the first time that the West Texas crop gets a lifesaving rain on Memorial Day, which is probably why the market has shown only a muted reaction to this potential problem so far. It will be interesting to see where things are when trading resumes on Tuesday. If it rains, the market will definitely breathe a sigh of relief and retreat somewhat, and if it doesn’t we may see a rather swift move to the upside.
If the situation in West Texas doesn’t change for the better over the next two or three weeks, US crop estimates will have to get scaled back significantly. The difference between rain and no rain could easily mean a swing of two million bales in the size of the US crop. If the US crop were to drop to let’s say 16.0 or 16.5 million bales over the next few months, it would have a significant impact on the market. Since US export commitments for next season already amount to nearly 6 million bales of primarily high grade cotton and domestic mills also rely on around 3.8 million bales of mostly premium grades, shippers would probably be forced to stop selling additional high grades until the fate of the crop is known at harvest time. This in turn would shift demand to origins like India, West Africa or Central Asia and help to underpin their prices.
Outside markets were a positive influence on cotton this week, as managed money seemed to favor commodities again after the sell-off of a few weeks ago. The grain complex had a very strong showing due to planting delays in the US, with December corn closing today within 5 cents of its 6.81 dollar/bushel contract high. Analysts fear that US corn acreage will fall around 2-3 million acres short of the latest USDA estimate, which if true should keep prices well supported throughout next season. Also, it was announced today by the USDA that China bought 116’800 metric tons of corn from US shippers recently, a sign that China is ready to step in during sell-offs in order to bolster its inventory. Cotton traders should take note!
So where do we go from here? We are clearly in a weather market at the moment and the next move will depend on what happens in West Texas. Our guess is that West Texas will get some moisture over the weekend, but it may prove to be too little too late, as the forecast calls for a summerlike pattern to follow in its wake. Could this be the year in which West Texas won’t be able to escape the drought?
While we have no firm opinion on July at this point, as we could easily see it move up or down 15 cents from here depending on what happens with the certified stock and outstanding mill fixations (still 2.0 million bales unfixed), we continue with the opinion that December represents decent value in the low 120’s, even if the US crop were to improve.
Best Regards
