Ag Market Update - August 6, 2015


by Ron Lee


Highway 118 West, PO Box 171

Bronwood, GA 39826




Agricultural Settlements

Commodity                 High                 Low                  Close               Change            YTD     


Dec 15 Cotton                  .6344                     .6210                    .6226                     - .0126                 - .0216

Dec 16 Cotton                  .6345                     .6215                    .6302                     - .0062                 - .0276

Dec 17 Cotton                                                                                .6378                     - .0057

Sep 15 Corn                     3.7500                  3.6925                  3.6950                  - .0325                 - .5325

Sep 16 Corn                     3.9625                  3.9125                  3.9125                  - .0375                 - .3675

Nov 15 Soy                       9.5550                  9.4200                  9.4375                  - .0950                 - .6175

Nov 16 Soy                       9.1275                  9.0050                  9.0125                  - .0950                 - .9075

July 16 Wheat                  5.3050                  5.1625                  5.2625                  + .0450                - .7075

Today's Market Report
After weeks and weeks of sideways action, we finally got a move in the tired, ole cotton market today.  And while the move was in the direction that we kindly expected, it wasn't in the direction that we were hoping for.  December cotton broke to 5-month lows on Thursday, settling at .6226, down 126 points. Distant month and year contracts were down by like amounts on larger than normal volume of nearly 40,000 contract.  My guess is that we should see open interest decline pretty good tomorrow as we washed a number of weak speculative longs out of the market.  While wheat traded higher today, up 4-5 cents, on strong export sales, corn and soybeans both finished lower.  Export totals for corn and soybeans were lackluster and weather concerns still seem to be on the back burner for now as both of these markets look toward next Wednesday's crop report for direction.  Actually cotton, corn, and soybeans all saw net cancellations on this week's export report which was the last one in the 2014-2015 marketing year.  More on the macro front in a second, but it should be noted that the privately held ag giant Cargill reported a $51 million dollar loss for the 2nd quarter of 2015 versus a $376 million dollar gain for the same time period a year ago.  Losses in grain merchandising. meat, and food ingredients contributed to the downturn for the company.  We are seeing further washout today in the energy sector as crude oil pushes down toward $44.00/barrel and RBOB gasoline is down another couple of pennies.  It should be noted that Bloomberg offered a short presentation comparing the current situation among commodities to that of 2008, seen here Unfortunately, of all the commodities in their index, I'm not aware of a commodity that has more bearish GLOBAL fundamentals than cotton. As for the broader markets today and I am writing this report a tad early today so this could change, we are seeing stock markets trade in a weak fashion once again today.  Today it seems that a semi-panic over Disney stock is taking the place of the one we saw with Apple early in the week.  For more bathroom reading and for those of you that enjoy sports like I do, check out this article on ESPN, one of Disney's subsidiaries, and you might be questioning Disney's stock value as well.  Granted, the piece was written under one of ESPNs biggest rival's shingle, but it's pretty interesting article nonetheless.   
Inside the Cotton Market
We said in our last update that we were wary of the old phrase "Never short a dull market", but were unaware of anything out there that might move our market higher.  Well, today the market took the path of least resistance and closed some 126 points lower and on 5-month lows as we mentioned in the previous section.  I don't know of one particular news item that got the ball rolling but once the sell stops were hit, it was just a matter of time before we were trading tenuously above .6200.  Some will probably say that the net cancellation in the old crop export report was the impetus but the market was very much on the defensive before the numbers were released and new crop exports were actually pretty decent at 125,000.  However, China was once again absent from the buyer ledger and that doesn't seem to change anytime soon.  From what we can gather, there are major problems within the cotton industry in China.  And again, unfortunately, we don't see that getting a whole lot better any time soon either.  Not only are cotton stockpiles in China not being resolved as the cotton becomes less spinnable every day, now we hear of huge, growing stockpiles of spun yard sitting idle in China.  On top of this, we are seeing spindles leave China as they price themselves out of the yarn-spinning industry because of input costs.  Once again, government interference can not trump the laws of Supply and Demand over an extended period.  Now India may be about to find out the same thing.  With a still attractive MSP price in place, we now see that the Indians only reduced cotton acreage some 3% this year and if monsoonal rains continue, we could see them produce even more cotton this year versus last year.  We have been leaned toward the short side of this market for months now, but still think it is a little too early for this market to really crap out.  With today's close, you will probably see pundits that have heretofore been bullish turn on a dime and start predicting that prices will move to 60 or 55 or even loan value prices.  As I mentioned on Tuesday, I do think we will eventually see prices trade with a 5 in front, but I don't believe it will be any time soon.  For one, despite seeing the market down 135 points today, we are still unable to build carry of any real significance in this market.  At this price level and lower, we will likely start to see increased decertification of stock which should keep the speculator from turning significantly short at these levels if they know what they are doing (a very real and good question by the way). For the second reason, we didn't just wake up this morning and decide we have a bumper crop across the cotton belt.  It is true that right now, the US crop has very good potential, but as we've mentioned time and again, this crop is far from in a bag and ties.  I had a merchant ask me my thoughts on the Georgia crop today.  I told him that IF we continue to have scattered to general rainfall and IF we get a normal to late frost, and IF we dodge the heart of Hurricane Season, we will probably challenge or exceed the state record of 1028 pounds per acre, which would render our 15-20% acreage cut all but meaningless in terms of usual production.  But as you can easily see, there are a number of IFs in my thought process and those IFs are still at least 4 to 6 weeks from reality. While this market will probably grind lower and then start a new sideways pattern, I just don't see a real flush out in prices until widespread ginning commences.  And just the same, that idea could be thrown a curve ball from either direction next Wednesday when we examine the USDA Supply/Demand numbers.  Luckily, with all of this bad news, nothing really changes as far as marketing your crop goes thanks to the USDA Loan Program, which in reality works far better than the schemes of our Chinese and Indian counterparts, despite what the WTO and the Brazilians would lead you to believe.  There will be some changes forthcoming with regard to world price and things as crop years change but right now a 246 point LDP would be in effect and that payment would get bigger next week as the market moves lower.  Therefore, our system provides a floor for your cotton price as we move lower from roughly .6500.   If you do decide to price cotton here, you are essentially just gambling that the price of cotton is indeed going to go lower as you have a free "put option" in place on the government's dime.  Therefore, I would say that there still isn't much to do in the way of cotton marketing at the moment.  In fact, I would probably lean toward the long side of the December market in the short term if you held a gun to my head.  That said, those with thoughts of a 70 cent market are probably a long shot at best now.  Those ideas that we had of 6700 to 6800 are likely iffy as well.  For those wanting to get some pricing in place, I would say now 6450 to 6500 is probably more realistic and even then I would probably suggest buying a March put at those levels rather than risking selling the physical cotton and losing potential quality gains.  So for now, reality seems to be finally setting in for the cotton market, but there will likely be some small opportunities before the other shoe drops in my opinion.