The market has remained undecided as to where it wants to go next, with the last eleven sessions closing in a narrow range of just 166 points. The structure is still more or less the same in current crop futures, with specs and index funds owning an equal amount of net longs, while the trade still seems to be firmly committed to the short side.
In fact, both sides have continued to add to their respective positions according to the latest CFTC report, with spec net longs (including non-reportable positions) up 1.3 to 6.1 million bales, index funds up 0.2 to 5.9 million bales and trade shorts up 1.5 to 12.0 million bales.
Outright trade shorts are actually quite a bit higher at 15.1 million bales, although some of that is obviously tied to new crop hedging. Nevertheless, we estimate that outright trade shorts in May and July still amount to some 11.0-11.5 million bales, which is an impressive number considering how little current crop cotton remains available.
Mills have made only some small progress in getting their unfixed on-call sales reduced last week, as they still amounted to 4.61 million for May and July combined. There were about 0.33 million bales added for December and later contract months, which brings total unfixed on-call sales to 6.71 million bales.
US export sales were surprisingly strong considering that prices traded 3-4 cents higher than the week before. Commitments for the current marketing year rose by 54’800 running bales net, while sales for August onwards increased by 135’900 running bales. Judging by the countries that booked these ‘next marketing year’ commitments, we have to assume that most of that cotton will be shipped from existing stocks during the August/October period.
Shipments were once again stellar at 345’000 running bales, and for those who are still concerned about Chinese cancellations, we would like to reiterate that outstanding sales to China amount to less than 400’000 bales.
While the market still has the potential to move higher on a short squeeze, we are getting increasingly nervous about the soon to be released government support and Reserve policy in China. Although most traders feel that China won’t make any drastic changes and instead may aim to reduce its stockpile in a slow and orderly fashion over the course of several seasons, even such a measured approach will probably have a negative impact on prices going forward.
Over the last three seasons production in the ROW (rest of the world) has outpaced mill use in the ROW by a combined 56.2 million bales. Thankfully China has been willing to absorb nearly the entire ROW surplus by importing 55.9 million bales during that time frame.