The latest CFTC report confirmed that speculators were the driving force behind the market’s advance, as they bought nearly 11’400 contracts net between December 4 and 10, while the trade was on the other side selling over 10’700 contracts, with Index Funds accounting for the difference with net sales of 700 contracts.
However, since the market had its biggest move on December 11, we are likely to see another large increase in spec longs and trade shorts in tomorrow’s CFTC report. We estimate that speculators are now close to 2.0 million bales net long, while the trade has probably boosted its net short to around 8.0 million bales, with Index Fund longs making up the remaining 6.0 million bales.
Speculators certainly have plenty of room to expand their net long if they decided to do so. Earlier this year, during the rally in March, speculators carried a net long of nearly 9.8 million bales. However, with momentum indicators still flashing overbought signals, specs are in no hurry to chase the market higher and instead prefer to wait for pullbacks before committing additional funds.
The trade has been a steady seller into this rally, as producers in a number of origins have made additional supplies available, which merchants bought and hedged with short futures. This has resulted in an increase in the ‘basis-long’ that merchants own, but with basis levels weakening it is doubtful that this position will continue to grow.
The problem with basis-long positions of non-US origin is that the long side consists of physicals that are still in abundant supply (Indian, West African, Australian, Brazilian, Central Asian), while the futures short resides in a fairly tight US market. We therefore believe that as a next step merchants may want to unwind some of their basis-long, which requires the buying back of futures and thereby adds to underlying support.
The increase in on-call sales constitutes another element of support. As prices are headed higher, mills prefer to buy their supplies on-call in the hope of fixing the price at a more favorable level down the road.
Last week alone on-call sales increased by 386’000 bales and they now amount to 5.34 million bales, whereof 4.9 million are on current crop March, May and July. Many buyers still don’t seem to realize that they are essentially taking a short position in the US market, which is getting tighter with every week of stellar export sales.
US export sales for the week that ended on December 12 were once again surprisingly strong at 242’200 running bales for the current marketing year and 6’600 bales for 2014/15, with a total of 17 different markets wanting a piece of the action. For the current season we now have total commitments of 7.3 million statistical bales, of which 2.7 million bales have so far been exported.
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