Ag Market Update - August 25, 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              .6286              .6316              - .0089          - .0126

Dec 16 Cotton          .6390              .6260              .6267              - .0106          - .0311

Dec 17 Cotton                                                        .6371              - .0106

Sep 15 Corn             3.7500            3.6375           3.6625             - .0250          - .5650

Sep 16 Corn             4.0175            3.9025           3.9175             - .0375          - .3625

Nov 15 Soy               8.8950            8.6725           8.7700             + .0300         - 1.2850

Nov 16 Soy               8.7925            8.6200           8.7150             + .0475         - 1.2050

July 16 Wheat           5.2700            5.0900           5.1300             - .0475          - .8400

Today's Market Report
I'm writing this update about 45 minutes before the close of the stock markets but FOR NOW things appear to be some better with regard to equities today as the Chinese Central Bank cut its interest rate by 1/4% as well as the requirement of cash that banks are required to hold overnight.  Unfortunately, this uptick in the stock markets has not translated into a similar theme for our cotton market as we fell further today after yesterday's big plunge.  December cotton settled at .6316, down 89 points, while distant month contracts fared even worse.  Volume was once again rather heavy at approximately 26,000 contracts.  Grains had a strange day, one that was almost a complete reversal of yesterday, albeit on smaller trading ranges.  Yesterday corn prices were extremely week prior to the traditional pit opening and then strengthened during the day.  Today, the exact opposite happened as we saw higher corn prices last night and into the morning  and then fade into the close.  Corn prices lost 2-4 cents across the board after being up a nickel or so early on.  Wheat prices were also on the defensive today, losing 4-7 cents, while soybeans managed meager gains of 3-5 cents.  Mostly favorable Midwestern weather continues to hang over the grain markets, but another surprisingly large export sale buoyed the soybean market today.  We are seeing the news out of China help strengthen the US dollar as well as crude oil (slightly) today, while gold and other precious metals are lower.  As of right now, the Dow is up 160 points, but after being up nearly 600 points earlier, I suspect 4:15 pm eastern can't get here quick enough for brokers.  In fact, we have lost 100 or so points since I started writing this 10 minutes ago.  It is believed that the Chinese will do whatever it takes to prop up their economy, likely through a series of rate cuts and money printing.  With their relative rate of borrowing significantly higher than ours here in the States, they do seemingly have more bullets in the chamber than we do, if we were so inclined to adjust our fiscal policy once again.  However, it still stands to reason that our exports of most everything into China, which certainly include cotton, are going to be smaller going forward, at least in the shorter term. I'm sure most of you read this before me, but it has been stated as fact that China has used manufactured and used more cement/concrete in the last 3 1/2 years than the United States did in the entire 20th century.  To me, that puts in perspective how unsustainable China's growth rate is going forward.
Inside the Cotton Market
Cotton price action was pretty firm overnight and made highs once people on the east coast made it into work this morning trading some 40-80 points higher and making our prediction from yesterday of moving back into the comfort zone between 64 and 65 cents look pretty smart.  Unfortunately, that didn't last for long as by the traditional 10:30 am Eastern open, prices were back to unchanged and spent the rest of the session grinding lower.  The move was somewhat surprising to me, in that we reduced open interest in December by nearly 3,000 contracts yesterday.  That figure, to me, would likely represent the weak longs that added positions above .6600 that were forced out.  As I mentioned earlier, volume was on the heavier side again today, which should have gotten rid of any others that didn't need to be there.  To reiterate my beliefs from yesterday, I do think the recent 61 to 62 cents lows SHOULD hold for the short term as we assess the size of the crop as it comes in, likely starting 3-4 weeks from now.  The USDA actually reduced the good to excellent category for cotton yesterday, with the biggest condition drop in the state of Louisiana.  The Texas crop was also slightly downgraded.  Also once again, I can't say we wholeheartedly believe these numbers, but who is better out there to give us the data than the USDA and those that they have out there in the fields. I still believe that unless the world economy continues to unravel, we should see prices stabilize in the 63-65 cent price range until the September 11th crop report.  The current update of Tropical Storm Erica puts the storm somewhere near the Bahamas as a Category 1 or 2 Hurricane by Sunday morning and toward the eastern side of the Florida peninsula by Monday.  There are also rumblings that the Indian monsoons are trending a little toward the weaker side of things in recent days.  As that crop is generally planted later in the calendar year than ours, widespread rains are still greatly needed for development.  Again, with the uncertainty of the domestic crop size (although we have our personal beliefs), the Hurricane season in full force, and the sudden current rumblings out of India, the recent lows around 6100 SHOULD hold.  However, it might not be politically correct to say and we don't have much of a 2016 marketing plan in place at current prices (in fact, no marketing plan in place) but for those that have forward sold a good portion of your crop it is no secret that cotton prices a dime lower than here do you far greater good than they do at .6400.  That is why buying some cheap calls tomorrow if we get a further push toward .6200 is a pretty good idea.  You could likely buy you a December 66 call for 100 points and have price protection regardless of which way the market goes from here.

Also, don't look now, but that Dow Jones that was up 600, and then 300, and then 150, is now down 15 points as I prepare to distribute this letter.  I'm betting the stock guys are probably counting down the hours instead of the days until Friday afternoon at 4:15.