Ag Market Update - February 11, 2016


by Ron Lee


Highway 118 West, PO Box 171

Bronwood, GA 39826




Agricultural Settlements

Commodity                 High                 Low                  Close               Change            YTD     


May 16 Cotton          .5935              .5829               .5871             - .0052          - .0540

Dec 16 Cotton          .6021              .5915               .5958             - .0054          - .0514

Dec 17 Cotton          .6190              .6165               .6175             - .0022          - .0270

Sep 16 Corn             3.7750           3.7300             3.7500            - .0050         - .0025

Nov 16 Soy               8.8850          8.7750             8.8700            + .0925         + .0425

Jul 16 Wheat            4.7500           4.6800             4.6825            - .0125          - .1500


Cotton LDP Payment - 5.15 cents  (estimated 6.91 next week)

Today's Market Report
Let the bloodbath continue....cotton prices, along with stock indexes and crude oil, continue to pummeled into submission, much like Buster Douglas did to Mike Tyson 26 years ago tonight. Cotton prices, despite a second week in a row of nice export sales, made a new low for the move, settled disappointingly, and traded even worse in the 2:15 pm - 2:20 pm aftermarket period.  We are now turning our attention to the May contract as it took the lead in open interest yesterday; May lost 52 points and settled at .5871 today.  New crop December continues to try and discourage cotton production here in the United States and settled similarly, down 54 points at .5958.  Cotton prices in May have now closed lower seven consecutive sessions.  The grains were generally quiet today with the exception of soybeans, which gained 9-11 cents and returned to the black for 2016.  Corn and wheat were largely unchanged on the day. Why beans were higher on the day is anyone's guess as both corn and soybean export sales were again on the disappointing side. Now for the news that's apparently bringing everything else down: First, crude oil settled at a 13-year low today, thus confirming our call of $26.00 oil being a low as another we can put in the "wrong" column.  Fears of overproduction and worries about the overall health of the world economy continue to dog the price of energy.  At some point, someone is going to have to blink and shut off the spigot on production or it's anyone's guess as where a low might be.  I have to think that all of these major oil companies are very heavy leveraged on the short side of the market by now, so hopefully when it turns, it will turn hard. The bigger problem is the equity markets around the world.  The Asian markets returned from the Lunar New Year holiday playing defense as you might imagine, the European markets followed suit, and so did the markets here in the United States.  The Dow is doing better as we head toward the close, down 240 points after being down almost 400 earlier.  The current focus is on the action of the Federal Reserve, where Yellen has been testifying in front of Congress the last two days.  Even though most industries and companies (outside of the energy sector) are doing relatively well, the idea of a global recession and even one here in the US have people pulling money out of the stock markets left and right; even as the dollar continues to move lower.  It's almost like a crackhead needing a fix at this point; the markets are begging for a reduction in interest rates and then the idea of negative interest rates are being floated around, which is already happening in Germany and Japan.  While a cut in rates could be artificially be a boon to markets and maybe help stabilize things, a move to negative rates seems absurd to me.  Where do you stop if you start down that road?  Hopefully, cooler heads will ultimately prevail.
Inside the Cotton Market
As noted earlier, the market has had a woeful six session string of trading, and is certainly in danger of violating a very, very solid level of technical support.  However, there are some fishy things happening with our market that need to be addressed.  Today was technically the last day of the "Goldman Roll" where speculators have moved their exposure from the March contact to the May.  We have seen tremendous volume during this rolling period; in fact today's volume of almost 75,000 contract is in the Top 15 volume days in history for cotton on the ICE exchange.  Tuesday's volume of more than 73,000 contract was just behind it.  The point of this is that during this free fall in prices, we should have been seeing open interest decline as spec longs were stopped out along the way.  Instead, we are seeing open interest go up.  While the speculator has more money than the merchant does cotton, I don't believe moving this abruptly to a short position for some of these specs will ultimately pay off.  It's almost like a group of speculators woke up one day said, "Cotton somehow outperformed every other commodity in 2015; everything else is down, let's pile in on the short side of cotton for a bigger bang for our buck."  The only problem with that line of thinking is that cotton fundamentals are getting better instead of worse.  Cotton export sales sales have been good the last couple of weeks (almost 500,000 bales combined) and most every merchant to a man will tell you they expect them to get better.  If prices continue to move lower, they are almost guaranteed to get better.  As cheaper competitors are sold out, these mills will turn to US cotton.  In addition, as the market moves lower, cotton acreage will get smaller every day; especially as corn and soybean prices stay flat or move higher.  The elephant in the room continues to be the Chinese reserve and the impending policy.  The market was not without setbacks this week however as the WASDE was decidedly negative as the USDA increased ending stocks both here and in the world.  Additionally, the country of Turkey, after a long investigation, has concluded that they will levy anti-dumping measures on US cotton.  The details aren't in stone yet, but a duty of nearly 6% on our bales going forward is expected.  Once again, the country that has helped every civilized country into the 21st century with regard to cotton production, ginning, spinning, etc. continues to be the world's punching bag when it comes to some sort of reparation, while here at home, we can't even get any help from our own law makers.  Not only did the Secretary basically stop the Cottonseed program in its tracks last week, our esteemed President had the gall to propose further cuts to crop insurance while increasing funds for food stamp programs in his final budget as farmers across the country face extreme loss of equity and in some cases, liquidation. Luckily, his budget, just like his last seven is largely symbolic as they will never be implemented by Congress.  My personal thought is my 9 year old could probably manage a budget better than Obama, and I'll just leave it at that.  How did I even get off on this tangent !!  Back to cotton, it does look pretty rough right now and it might get even sloppier tomorrow with March options expiring; however, I think this is good place to initiate a long position in cotton with relative low risk.  Being within 150 points of the obvious low, I think a shot from the long side risking a close below 5700 is a pretty good risk/reward.  Being 0 for 2016, the law of averages say I have to be right eventually, don't I?  Never mind, don't answer that question. Nevertheless, I don't think I would be wanting to establish a new short position here at .5800.