In order to figure out where prices are headed to, it is important to look at who is likely going to do what in the futures market over the next few weeks and months. When we look at the latest available CFTC report as of June 2nd, we have the following snapshot in regards to the position of the various players in the market:
• Large Speculators = 2.7 mio bales net long • Small Speculators = 1.0 mio bales net long • Index Funds = 6.0 mio bales net long • Trade = 9.7 mio bales net short
While speculators and the trade are market driven in their decision making, index funds are purely driven by money flows. Index funds haven't been very active in recent months, but are more likely to increase than decrease their current position.
However, what we really need to focus on in terms of market impact is what speculators and the trade are possibly going to do. The first thing we notice is that there is quite an imbalance between spec longs and trade shorts at the onset, to the order of 3.7 million bales long versus 9.7 million bales short.
Given the current macroeconomic environment, with the outlook for inflation and a weaker dollar, it is unlikely that speculators will turn into net sellers anytime soon and we may even see them add to their current net long position.
This brings us to the trade. These 9.7 million bales net short are primarily hedges against physical long positions (US, Brazil, Australia, African), or they are shorts against unfixed on-call sales. There are currently about 4.2 million bales of unfixed on-call sales and 1.4 million bales of unfixed on-call purchases open.
It is probably fair to say that over the next two or three months there is very little supply coming into the market that would require the trade to sell futures against, while it is quite likely that a big part of this 'basis-long' position will be sold to mills before new crop arrives and we should also see mills fixing some of these outstanding on-call sales. If we are correct in our assumption, then the trade too will turn into a net buyer of futures over the coming months.
If speculators and the trade are both on the buy side, then who will take the short side? The answer is that short sellers can always be found when the price is right, but we don't think that 55 cents or even 60 cents will do the job and that it may take a much more pronounced spike in prices to lure short sellers back into the market.
In summary, we feel that the certified stock issue has been resolved since there is now full carry in the market and that this should allow prices to move higher over the coming months based on the above described imbalance between potential buyers and sellers.
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