Just when it looked like the market was finally getting ready for a bounce after trading sideways for the last eight sessions, a new wave of selling forced values another 200 points lower today. We still feel that trade’s lack of adequate price protection has been the main driver behind the market’s weakness.
Last Friday’s CFTC report showed that the trade continued to be a net buyer in the futures market for a third week in a row. During the week of July 9-15, the trade bought 0.8 million bales net, bringing the three-week total to 2.6 million bales. In other words, instead of expanding its short position in a falling market, the trade keeps tripping itself up by reducing it.
As of last week the trade net short position amounted to just 5.6 million bales, which is not even close to what it should be given the expected size of the US crop as well as some other origins that typically use the US futures market for price protection. By comparison, a year ago the trade net short position amounted to 13.2 million bales!
By getting out of shorts on the way down the trade has obviously been trying to pick bottoms, which clearly backfired and has set the market up for sharp down moves like the one we witnessed today. When the anticipated bounce fails to materialize, traders are often forced to re-enter a short position by selling at the market. That has apparently happened this morning, when a large sell order in December futures triggered a cascade of sell-stops and panic-like selling.
As long as the trade is not adequately hedged while the fundamental and technical outlook are getting more bearish, it is difficult to envision an end to this rout. After the market managed to stabilize near 68 cents for a while, today’s decline has once again opened the door for additional losses.
What will it take to finally halt the market’s decline? In other words, at what level will sellers refuse to chase the market lower and when will buyers show up in greater numbers? When we look at it from a growers’ point of view, the current price level is already at or below the cost of production. Since locking in a loss is a tough thing to do, especially while the crop is still in the field, we expect grower selling to slow down considerably from here on down.
Furthermore, with the forward AWP (Adjusted World Price) calculating just a couple of cents above the government loan, additional price protection mechanisms are starting to come into play that may reduce the need to sell the futures market.