Ag Market Update - August 12, 2015

 

by Ron Lee

 

Highway 118 West, PO Box 171

Bronwood, GA 39826

Work:229.995.2616

Mobile:229.881.3903

ronlee@mccleskeycotton.com

 

Agricultural Settlements

Commodity                 High                 Low                  Close               Change            YTD     

 

Dec 15 Cotton          .6482              .6120              .6469              + .0287         + .0027

Dec 16 Cotton          .6490              .6225              .6397              + .0131         - .0181

Dec 17 Cotton                                                        .6481              + .0122

Sep 15 Corn             3.8275           3.4650            3.5875             - .1775          - .6400

Sep 16 Corn             4.0200           3.7500            3.8375             - .1125          - .4425

Nov 15 Soy              9.7600           9.0150            9.1325             - .5825           -.9225

Nov 16 Soy              9.2750           8.7975            8.8900             - .3650           - 1.0300

July 16 Wheat          5.3400           5.0450            5.1250             - .1550           - .8450

Today's Market Report
Anybody get the number of that truck???  The USDA laid the smack down on the agricultural row crop commodities today in a manner that left many market participants wondering if they were reading a series of typographical errors.  Cotton numbers wildly bullish, grain numbers wildly bearish.  The tone was so eyepopping that another round of currency manipulation by the Chinese government was thrown in the trash can with the morning coffee cup.  Cotton prices soared to the biggest one day percentage gain of the 2015 year, closing nearly limit up in the December contract at .6469 after earlier in the session taking out the yearly low at .6128.  Honestly, I can't recall the last time that happened.  It was a totally different picture in the grain market.  Apparently, I've learned something today that I haven't known for the first 20 years of my agricultural career:  Rain makes grain, but it doesn't make cotton.  Of course, I'm being facetious, but after nearly every analyst agreeing where crop size for corn and soybeans would come in today, the USDA threw a huge curveball by putting both crops significantly larger than the 165ish corn and 44ish soybeans that we mentioned yesterday.  The USDA indicates that the corn yield will be closer to 169 bushels and the soybean yield closer to 47 bushels.  Almost instantly, we saw a tame market in Chicago drop like a 90 pound hammer off a tall roof once the numbers were revealed.  Corn touched its 30 cent limit while soybeans touched their 70 cent limit.  As the session wore on, calmer heads prevailed and corn finished the session lower by 16-17 in current crop and 7-8 cents in 2016-17 crop seasons.  Likewise, soybeans still finished in a suffocating manner, losing 53-59 cents in current crop dealings and 34-36 cents in 2016-17.  November 16 soybeans traded below 9.00 for the majority of the session, putting a damper on the idea that growing beans beltwide are a probability.  Wheat finished 13-15 cents lower despite a rather neutral report as it tagged along the coattails of its sister crops.  To state the obvious, today's action in the grains will either likely be a seasonal low and tremendous buying opportunity if trade numbers proven to be correct, or the start of a longer term bear market that is only just beginning if the USDA numbers proven to be found correct.  The next key will be the numbers coming from the annual crop tours that are done in the Midwest that should commence next week.

As I mentioned earlier, lost in the shuffle of these wild USDA numbers today was the fact that the Chinese government once again devalued its currency overnight, sending the Yuan initially tumbling again against the dollar and other currencies around the world.  However, just as I insinuated yesterday, the dollar sold off in a tremendous manner today, down more than 1000 points as it would seem that China is doing the Federal Reserve's job for itself by almost tying their hands on raising interest rates in the near future.  The Dow Jones, initially down by more than 260 points, is currently only down by 20-30 as calmer heads are prevailing, or at least being scratched. Amazingly, the energy markets have been very quiet nearly the entire session while all of this hulaballoo has been going on .  It certainly been anything but your normal "No News Wednesday".
Inside the Cotton Market
The USDA certainly did a number on the cotton market today and I can't find one single person in the entire industry that believes hardly any of it.  Fortunately for the cotton producer, these are the numbers that the market will trade, at least for the time being.  Where do we start??  The USDA today took the US crop down from 14.5 million bales to 13.1 million bales despite a crop that is rated 57% good to excellent (vs 52% last year) and 91% fair to excellent (vs 86% last year).  The agency is also calling for a nearly 20% abandonment rating in the state of Texas versus last month's numbers despite a Texas crop that nearly everyone says is off to the best start in at least 5-6 years. The Texas yield number at 606 lbs/acre is also laughable in my opinion.  If anyone in Texas taking this update can get me better information and believe that their state will make 50 lbs to the acre less than last year, please do so via email or phone!!  The Georgia yield estimate was 925 lbs/acre, which I believe to be well short of potential, but believable at this early stage of the game.  The USDA also put out some bullish data with regard to beginning and ending stocks.  United States beginning 15-16 stocks were reduced by 500,000 bales.  The increase in exports of 300,000 or so, I agree with as the numbers bear them out.  However, the agency also says we have LOST 230,000 bales in this country.  Can you please tell me how we simply misplaced 115 million pounds of cotton in the most civilized country in the world in the last month?  So at the end of the day, the USDA sees the United States finishing 2015-16 with only 3.1 million bales versus a 4.2 million number last month, a simply staggering cut with no statistical or anecdotal evidence to back it up.  On the world scene, the big changes in the US numbers had the most effect on the numbers as the world projected ending stocks moved from 108.1 million bales to 105.1 million bales.  The Chinese crop was cut by one million bales and the Indian crop cut by 500,000 bales as well.  Again, sitting here in Bronwood, Georgia it is hard for me to jump up and down about the size of a crop somewhere halfway around the globe but I read crop reports everyday and I just don't see the justification.  Nevertheless, today's price action is good news it would seem for the US unhedged farmer.  I say it's not great news because all the 300 point gain today did was essentially erase 300 points from a potential LDP payment.  Now if today's move is the start of something bigger, yes, it is great news.  Unfortunately, you are going to have to color me very skeptical on the entire deal.  First off, the problems in China are real.  They didn't go away with a monetary policy shift in China overnight or with a WASDE report in Washington this morning.  If we weren't selling a single bale into China at 62 cents, what makes one think we will start selling them at 65 cents?  I just don't get it.  I personally think the cotton speculator is about to get taken for another money-spewing ride by the cotton trade, seemingly for about the 10th time this year.   Volume in cotton today was huge at more than 60,000 contracts, certain to be some new spec longs in the market based solely on reading the numbers in this report.  Unless I see something different, this market is still a strong sell at .6600 to .6700 based ON WHAT WE KNOW TODAY.  I have to believe that trade estimates with boots on the ground in the heart of cotton country has a better idea of the crop that is out there than does the USDA and a 1.4 million bale cut month over month despite very good crop ratings by the USDA makes absolutely no sense in my estimation.  I say all of this and truly hope that I am dead wrong because if we are truly sitting on a very tight 3.1 million bales of ending stocks in this country come next July, prices are heading much higher, much quicker than I ever dreamed we would.  That said, I can't see a scenerio out there where corn and soybeans go into a long, tenuous bear market and cotton turns on a dime higher.  Once again, this WASDE report on the whole just doesn't make good sense. I simply don't buy the logic behind the numbers in this report.  I would be selling physical cotton at .6600 to .6700 basis December if I had no already done so if I were a cotton producer. I keep scanning these numbers to find something that I am missing, but keep coming up empty.  Again if anyone on this correspondence list can give me the USDA's reasoning behind these numbers, I eagerly await your response.