Ag Market Update - February 29, 2016

 

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     

 

May 16 Cotton          .5762              .5453              .5656              - .0097           - .0755

Dec 16 Cotton          .5708              .5419              .5619              - .0090           - .0853

Dec 17 Cotton          .6025              .5930              .6050              - .0103           - .0395 

Sep 16 Corn             3.7150           3.6700            3.6750             - .0250           - .0775

Nov 16 Soy              8.7625            8.7200            8.7425            - .0175           - .0850

July 16 Wheat          4.6275            4.5725            4.5950              unch             - .2375

 

Cotton LDP Payment - 7.34 cents/lb 

Today's Market Report
Wow, what a day.  I'm glad Leap Year only comes once every four if today is any indication.  Cotton prices made fresh SIX YEAR lows today and then exploded to the downside before clawing it's way back to what I would have to term a "respectable" settlement.  May cotton settled at .5656, down 97 points but more than 200 points off the panicky .5453 low reached this morning.  December cotton was just as wild, ranging from .5419 to .5708 and closing at .5619, down 90 points.  Like I said, it was a wild ride today.  Volume, not including spreads was an eye-popping 60,000 contracts, an almost unheard of number for a day void mostly of spreads.  Much more on cotton later.  Grains have been mostly lower since our update last Monday and were fractionally lower again today.  Corn futures were down 2-3 cents, while soybeans were down 1-2.  Wheat prices were unchanged.  Numbers from the USDA Annual Outlook Forum indicate corn acreage at 90.0 million acres (up 2 million from last year) and soybean acreage at 82.5 million acres (down from 82.7 last year).  Obviously, most of this land will come at the expense of wheat land, which is forecast to be down 3.6 million acres this year.  Now that cotton has slipped almost a dime since January 1, I would certainly assume some of those cotton acres are slowly, but surely moving to other crops such as corn and soybeans.  Broader markets have been pretty steady in our stead, and are again today.  We have seen crude oil up over a $1.00 today and is now knocking on $34.00's door, despite pretty bearish news last week when Saudi Arabia indicated no willingness to cut production at all.  Stock markets are lower today, but still well off the lows from a few weeks ago when the most negative ideas were being floated around.  So for now, there is little doubt who is the weakest kid in the room, and that would be our old friend, the #2 ICE cotton contract.
Inside the Cotton Market
Where do I start?  I spent the better part of last week in Memphis, listening to those that I consider the smartest people in the world when it comes to the in's and out's of our cotton market.  Most of the vibe was the same:  There is a light at the end of the tunnel, it just might be a long tunnel.  Well, this morning when cotton was trading limit down at just above .5400, I had decided that the light might, in fact, be the nose of an oncoming train. As mentioned in the section above, the market did recover about 200 points and the close certainly gives the indication that a great deal of capitulation was had today.  However, the elephant in the room that we've discussed over and over and over is reportedly going to be weighed and measured tonight as the Chinese government is set to reveal the details of their plans to relieve themselves of some of their 50-60 million bales of excess cotton.  For those that have been reading this letter for the last 4-5 years, you will recall that my reason for being somewhat bearish when the rest of the world was bullish were in fact those stocks and the inflated prices that keep our stocks growing.  Luckily, for cotton growers, my bearishness was about 24 months too early and we were able to sell cotton at what now appears to be inflated prices during those years as the Chinese vacillated and never really tried to rid themselves of this cotton, keeping supply around the rest of the world relatively tight.  Now, when I was ready to become somewhat supportive of prices because of receding ending stocks and the questionable quality of those stocks, the hammer is finally getting ready to drop or so it might appear.  Nobody knows what the plan will be; well let me rephrase that, there appear to be some that THINK they know what the plan may be, judging by the huge influx of speculative shorts in our market over the last 4 or 5 weeks. But, according to sources, we will all know the plan when we wake up in the morning.  As an aside, it has been calculated that the Chinese government is now in the hole more than $30 billion (with a B) in an effort to support their growers, and in turn growers around the world, and the irony is that growers in China are now fleeing cotton plantings in huge numbers as prices have finally receded and mill use in China has moved offshore as well.  Cotton growers in the US will be there to reap benefits EVENTUALLY, if they will stay in the cotton business.  I'm sure there are growers across the country today that if they looked at December 2016 and saw it at .5450, were saying, to hell with cotton, I'll plant something else.  I'm not blaming you if you do; although the cold, hard truth is that you will likely see the same, and probably more money at .5450 than you did at .6450, and would likely see even more at .4450 than at .5450.  And for the record, unless the Chinese come out tonight with a buy 1 bale, get 3 free sale like you'd see at Joseph A Bank store, I'm not calling for prices in the 40's.  I don't think we see the market totally crap out unless China puts the possibility of exporting those bales on the table. It could happen, I guess.  However, with cotton growers being able to use certificates in lieu of LDPs and thereby not counting against one's payment limits, and an insurance guarantee set at .6200; it might not be the politically correct thing to say but it doesn't take a genius to see that for those that take out revenue insurance and the STAX, cotton at .40 cents next fall is tremendously more profitable than cotton at .60 cents is.  Additionally, the quality problems that cost everyone so dearly last year wouldn't be as big of a potential issue as certificates/LDP don't have quality discounts in their equation.  Again, I don't blame any grower for going to a different crop this year, especially if you can make it pencil out a profit.  In fact, the market may indeed be telling us NOT to plant cotton. The news that the USDA had cotton acreage at 9.4 million acres on Friday, higher than the NCC's 9.1, obviously wasn't met with good reception today.  However, for those that have planned to keep rotations intact and have the equipment to plant cotton, I wouldn't personally let this recent drop in prices affect my decision to plant cotton.  I would also lean on side of thinking that today was a significant low, perhaps THE LOW, if not for the impending Chinese decision.  This time tomorrow, we will be back here with what, I assume to be the details of that decision, and the potential devils that lie within those details.  I'm hoping that we will have seen the biggest "Sell the Rumor, Buy the Fact" that we've seen in years on this news, but in any event, clarity is what we need most and we hope to get that in the next 24 hours.  This entire 8-9 cent decline has been attributable to the lack of clarity regarding the policy.  In the meantime, I invite you to check out our website, which we are proud to finally release.  It can be accessed at www.mccleskeycotton.com .  We have a page for delayed quotes and charts there, along with the ability for our customers to access their production records at the click of a button.  We hope this will be a useful tool for them and any potential customers we can attract in the future, for McCleskey Cotton and our associated businesses.  The archives of this letter can also be viewed on the site and at some point, you will have to register on the site to continue receiving it.  I hope you enjoy it and find it useful.  Back here tomorrow.