Current crop futures continued to move higher in search of willing sellers, as speculators as well as the trade were both inclined to buy the market, albeit for different reasons. Speculators seemed to like the price action and continued to add to their net long position, while the trade was forced to play defense as the large amount of rolled call options bears witness to.
Since falling into a hole in October, when prices dropped about 10 cents from the mid-80s, the market has managed to reclaim all of its losses over the last two months and is once again trading in familiar territory. As you may remember, the market spent most of last year in a relatively narrow range between 82 and 88 cents, with a few short-lived spikes above 90 cents.
Looking at the statistical picture it would make sense for the market to trade in a similar price pattern as last year. With the ROW surplus once again being absorbed by Chinese imports, inventories outside China are expected to remain little altered.
The ROW started the season with beginning stocks of 38.8 million bales and is forecast to end it with 39.3 million bales at the end of July. Exporters like the US (-0.9 million) and India (-0.4 million) are projected to end up with slightly smaller stocks, while Southern Hemisphere producers Brazil (+0.93 million) and Australia (+0.68 million) are expected to see their inventories go up.
Apart from statistical similarities there are also some other interesting parallels to last season. For example, the latest CFTC report shows that large speculators owned nearly the same amount of net longs as a year ago, 3.27 million bales as of January 14 versus 3.15 million a year earlier. The trade was 9.48 million bales net short last week, versus 10.86 million a year ago, while Index Funds are about a million bales less net long than last January at 6.03 million bales.
A year ago speculators continued to add longs, as their net long position more than doubled to 7.6 million bales by March 15, when the spot month reached a high of 93.93 cents. Open interest in futures had risen to 213’417 contracts by that time (currently 185’859) and the trade tried desperately to stop the market in its tracks by boosting the certified stock from 108’414 bales on January 23, 2013 to 420’922 bales on March 15. However, it wasn’t until the trade had covered most of its short before the market finally sold off and eventually dropped to a low of 80.82 cents by April 24.
Is it déjà vu all over again? We don’t know whether history will repeat itself, but the dynamics are conspicuously similar. When we look at the unfixed ‘on-call’ position, the situation is potentially even more explosive this season. Last week’s on-call sales rose by another 344’200 bales, of which 287’800 bales were in current crop.
While March saw its on-call position drop by about 100’000 bales, there were over 380’000 bales added in May and July, which by the way hints at another stellar US export sales report tomorrow. Total unfixed on-call sales now amount to 5.95 million bales, of which 5.37 million are in current crop. By comparison, a year ago total unfixed on-call sales amounted to 5.18 million bales, of which just 3.90 were in current crop. In other words, there are a lot more procrastinators this time around!
So where do we go from here? Based on the above analysis there is certainly a chance that the market is going to follow in last year’s footsteps and the short squeeze continues. However, the market will not go up in a straight line and there are going to be periods of consolidation.
Conflicting news stories like the ones from China earlier this week and momentum indicators signaling ‘overbought’ conditions may prompt some specs to take profits, but unless the majority of specs gets spooked out of their long positions, trade shorts may have a rough road ahead. Adding more on-call sales week after week certainly isn’t helping their cause!
What complicates matters for the trade is the huge 800-point gap that exists between current and new crop. Last year at this time we still had flat board all the way to the December contract, which made it conceivable to roll a short position from current to new crop, while today’s 800-point cliff is simply prohibitive.
If this huge gap between July and December persists, it will create a sense of urgency among merchants and growers to dispose of existing long positions before prices roll over to December. The unwinding of market and basis-long positions could take a toll on the basis, as physical prices come under pressure, while NY futures find support from short covering.
As expected, new crop prices continued to divorce themselves from current crop, as strong resistance emerged from hedge selling once December approached the 80 cents level. This trend is not likely to reverse as long as the current market forces (short covering in current crop versus hedge selling in new crop) persist.