Ag Market Update - February 8, 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     

 

Mar 16 Cotton           .6012              .5875              .5960             - .0037          - .0368

Dec 16 Cotton          .6153              .6020               .6118             - .0020          - .0354

Dec 17 Cotton          .6200              .6200               .6274             + .0047        - .0171

Sep 16 Corn             3.8200           3.7675             3.7750            - .0350         + .0225

Nov 16 Soy               8.8400           8.7600             8.7775            - .0550         - .0500

July 16 Wheat           4.7700           4.6725             4.6850            - .0725         - .1475

 

Cotton LDP Payment - 5.15 cents  (estimated to be near 6.50 next week)

Today's Market Report
It has been a rough patch for the cotton market since our last update during the middle of last week with prices tumbling to contract lows in the March contract today before a late buying flurry allowed prices to close slightly above that level.  March cotton settled at .5960, down 37 points.  For those looking for silver linings, and I'm running out of them, the fact that we closed 85 points off the .5875 low is a valid one, I suppose.  The most troubling part about the almost 400 point move from last Wednesday's high to today's low is that most of the cotton-specific fundamental news was BULLISH.  More on that later.  Unfortunately, the ongoing situation with the world economy continues to be very BEARISH, and cotton certainly can't stem that headwind alone. Today, we are seeing the Dow Jones down 350 points, crude oil back under $30.00, and a flight to the known "safe haven" Gold, which is up $40/ounce.  Gold prices touched $1200 for the first time since June of last year on the economic concerns today.  The S&P is poised to make a 22-month low today, as well. In the grain pits, prices were lower as well as the bullish feeling we thought we might be experiencing there early last week has certainly waned, especially in the wheat market, which tumbled another 6-7 cents today.  Corn and soybeans were both off by 3-4 cents to start the week. Again, the concerns over the world economy were cited as features for the weakness, although improving South American weather forecast and ample supplies continue to hang over these markets. We will see the monthly Supply/Demand numbers from the USDA tomorrow, but right now that seems like an afterthought as everyone and all markets just generally seem to have a case of the mulligrubs at the moment. 
Inside the Cotton Market
Can't sugarcoat the action of the cotton market over the last 3 1/2 sessions, and to be honest, my prior assessment of the market was just plain wrong. It certainly seems as if a trip back toward the top of the well-defined range was in order.  Then on Wednesday and Thursday, we saw positive fundamental news, only to see prices fall totally out of bed afterwards.  One of the few things that I have learned in this business over the years is that a bearish reaction to bullish news is never a good sign for prices.  On Wednesday we received the news of the Agricultural Secretary's decision not to delegate cottonseed as an oil seed, which on the surface probably had close to zero market impact.  However, any legislation or potential legislation that will fail to increase cotton acreage is not a bearish item. Then on Thursday, we saw the dollar index fall dramatically, down more than 200 points over two days, coinciding with a marketing-year high in export sales of more than 250,000 bales and the market celebrates it by closing almost 200 points lower. It was about then that the "Houston, we have a problem" line flashed into my head.  Friday was just a day of grinding prices amid huge spreading volume, which outside markets were again puking, with the market settling fractionally lower.  Today was another huge volume as the Goldman roll hits its stride as they roll their positions from March to May. Volume was estimated at more than 60,000 contracts again today. Over the weekend in Dallas, the National Cotton Council released their initial estimate for the 2016 plantings as seen below. 
  The 5.4% increase was expected, perhaps even short of increased expectations by some.  I didn't think we would see a reduction in Georgia cotton acres and expected a larger increase in Texas, but with the exception of South Texas which will plant near the end of the month, these numbers could change a hundred times between now April.  Many growers are still concerned about credit availability and may eventually be planting what their bankers tell them too anyway. The overall mood at the meeting was decidedly one of concern after Vilsack's decision, concerns about overall cotton demand, and the suddenly free falling market.

  New crop cotton at .6100 essentially isn't any different than cotton at .6400, nor will it be if prices move into 50s on December.  The LDP will remain in play and get larger as ICE futures and subsequently, the Cotlook A index, goes lower.  Two good things about a larger LDP: the money no longer goes against a producer's payment limits and there is no grade discount associated with an LDP.  As for now, the market is certainly is somewhat in a state of panic as the charts look downright awful. The somewhat good news is that we have held support, for now, on the larger 1100 point range that has been in place for almost 14 months now (6830 on the high side, 5705 on the low side).  Closing back above the contract low today, after seeing heavy volume trade below would also be termed as "cautiously optimistic" news.  The move lower the last few days probably feels worse that it otherwise would because we have just become pretty unaccustomed to large market swings in the last year.  For those with long positions or still holding 2015 bales, especially if they have taken the LDP, it hurts nonetheless.  First things first, we will have to digest the numbers from the USDA tomorrow at noon.  Most expect further crop reductions, which have served as the catalyst for the reduction in world ending stocks over the last couple of reports that really served as my reasoning for a evolving bullish lean.  After that, we will have to judge the mood of the speculators, see if these low prices encourage more sales (which will be tough as basically all of Asia is off all week celebrating the Chinese New Year or Spring Festival or whatever you want to call it), and basically see if the world economy can start to right itself. The other component in this equation is the manner in which China is expected to release a portion of their reserves in the coming weeks and months.  I do believe that the lower we go now, the higher we could see prices go later, which sounds pretty vague I'm sure.  Unfortunately, there seems to be some still rocky roads to traverse between now and then.  We would certainly hope the .5705 low will hold; if not it could be Katy, Bar the Door, especially if the world economy falls into widespread recession. And I know this is probably exactly what you wanted to read on a sluggish, cold, windy, Monday after the Super Bowl.