Plexus Market Comments
Posted : June 15, 2021

PLEXUS Market Comments

Market Comments – June 03, 2021

NY futures continued to move higher during this holiday-shortened week, as July added 160 points to close at 84.21 cents, while December gained 119 points to close at 85.04 cents.

Relatively tight inventories among major suppliers, combined with strong demand from the downstream sector, have continued to shore up NY futures this week. Even though the market has that beaten down feeling since July is still over 1000 points below its February 24 settlement high of 94.33 cents, the situation looks a lot more constructive for December, which closed today just 258 points below its contract high of 87.66 cents.

Although the export sales report is delayed until tomorrow, we have heard of good offtake over the last couple of weeks thanks to the US being among the cheapest origins available at the moment. Competitors like Brazil and India, which are the largest exporters after the US with a combined 16.2 million bales, have seen their local prices shoot up recently.

In Brazil spot prices reached over 97 cents, delivered mill South Brazil, which is considerably above export levels, while in India prices quoted in rupees are at their highest level since mid-2016 and have rendered Indian exports uncompetitive for now. Mills in the South of India are actually interested in importing WAF and Australian styles.

As we leave the current season with relatively tight inventories in many of the relevant origins, it puts greater emphasis on new crop production. Fortunately the outlook has improved somewhat after West Texas has received copious amounts of rain, while the Indian monsoon seems to be off to a good start and even Brazil has received some last minute rainfall that might improve yields.

The big story has been West Texas, where Lubbock has seen over 6 inches of rain in May, which is the 8th largest amount on record. However, these downpours, which were accompanied by strong winds and in some cases hail, seem to be a mixed blessing. Too much of a good thing has turned into a challenge for growers, who are now trying to beat crop insurance deadlines, especially south of Lubbock, where a June 5 deadline looms.

While some acres may be claimed by insurance and/or competing crops, like milo, we believe that on balance we are looking at an above average potential for the region. The weather looks a bit warmer and drier over the coming days and if summer were to finally arrive in West Texas, cotton should be doing well with all that moisture.

The Texas coastal bend, which normally accounts for over a million bales of production, has seen its wettest May on record and more heavy rain is forecast for the coming days. Many fields remain waterlogged, which makes crop management difficult and yield prospects are therefore being scaled lower. There is still time for things to improve, but the fear is that this crazy pattern is going to persist and the market will therefore keep ‘a weather eye on things’.

The CFTC spec/hedge report showed more spec liquidation during the week of May 19-25, when July traded between 84.28 and 81.50 cents. Speculators sold 0.89 million bales to trim their net long to 4.85 million bales, while index funds cut their net long by 0.06 million to 8.05 million bales.

The trade was once again a strong buyer into weakness, reducing its net short by 0.95 million to 12.90 million bales. This brings the two-week total for the trade to 2.21 million bales of net buying.

Speculators now have the lowest net long since the end of September 2020. Recent spec liquidation was due to a variety of factors, namely the crackdown on speculative positions in China, the rains in West Texas, which have taken some of the bullish narrative away, and bearish chart triggers. However, after the spec net long dropped from 8.3 million to 4.9 million bales since early March, we believe that whoever needed or wanted to get out is now gone and that the remaining spec long has staying power.

So where do we go from here?

December seems to be well supported in the low-to-mid 80s and we still see more upside potential than downside risk at current levels. Despite what the statistics say, supplies around the globe feel tight and there is not much margin for error on the production side.

The market will probably remain in ‘wait-and-see mode’ for now, but it is ready to jump if there is a problem on the production side. Outside factors should remain supportive as well, as inflation expectations are rising, with governments and central banks ready to do ‘whatever it takes’ to boost economic growth. Consumers are flush with cash as we finally emerge from this pandemic and this promises strong demand over the coming months.

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