NY futures traded sideways this week, with December edging up 24 points to close at 63.73 cents, while December'08 managed to advance 95 points to close at 73.00 cents.
The market continues to be torn between a short-term bearish scenario, as harvest pressure is starting to build in key origins, and a longer term bullish outlook based on a tightening balance sheet.
With about a third of the US crop already harvested and open skies allowing for quick progress on the balance, we should see loan stocks increase substantially over the coming weeks. Large loan stocks traditionally act as a stabilizing factor in the market, because they alleviate US supply pressure, yet they also provide a reason for the trade to sell futures on rallies in order to lock in a favorable spread to the loan redemption value.
The loan factor has not really been in play since May, which has allowed the spec community to run the show for the last five months, but this is likely to change in the coming weeks and as a result we would expect to see a tighter trading range for a while.
Tomorrow the USDA will release its latest figures on the US crop and on global supply and demand. The consensus is for the US crop to increase to around 18 mio bales, thanks to a potential bumper crop in West Texas. As far as the world numbers go, we could see an upward revision of China's 2006/07 crop from 32.5 to 35.5 mio bales and perhaps a 1.5 to 2.0 mio bales upward adjustment in the current crop.
However, this does not automatically mean that ending stocks will jump by the amount of these revisions, since the USDA currently shows a 5.0 mio bales 'adjustment factor' for China, which it may reduce accordingly.
Circumstantial evidence suggests that ending stocks in China were at a relatively low level at the end of last season, with 10-year old stocks fetching surprisingly high bids at government auctions, which means that any retroactive upward adjustment in ending stocks would not make sense.
India's crop number should also see a further increase of at least 0.5 mio bales to 24.0 mio bales, if local estimates are any guidance. We would therefore not be surprised to see world production for the 2007/08 crop rise towards 120 mio bales, which would be close to the record of 121.17 mio bales of three years ago.
While production seems to be headed higher, it will be interesting to see what the USDA does with consumption. So far the USDA has maintained a fairly optimistic view on global consumption at 127.8 mio bales, although the building of yarn stocks in several markets may be an indication of softer mill use, particularly in China.
