Ag Market Update - January 12, 2016


by Ron Lee


Highway 118 West, PO Box 171

Bronwood, GA 39826




Agricultural Settlements

Commodity                 High                 Low                  Close               Change            YTD     


Mar 16 Cotton          .6228              .6145              .6159              + .0009          - .0169

Dec 16 Cotton          .6325              .6273              .6286              + .0010          - .0186

Dec 17 Cotton                                                        .6354              + .0012          - .0091

Sep 16 Corn             3.8050            3.6750           3.7375             + .0425          - .0150

Nov 16 Soy               8.9175            8.7000           8.8575             + .1200          + .0300

July 16 Wheat           4.9425            4.7500           4.9050             + .0950          + .0725


Cotton LDP Payment - 4.40 cents/lb   (estimated at 5.20 cents next week)






Today's Market Report
The first USDA Monthly WASDE report of 2016 was a fairly docile one, as January reports generally are.  With most all of the crops gathered across the Northern Hemisphere, January and February are usually fairly free of surprises as the statistics surrounding our row crops are pretty well widely known by this time of the marketing year.  Cotton prices once again attempted to move higher in early trading before late selling, presumably from another round of long-only index fund rebalancing, cut into those gains. It has been reported that we could see another day or two of this action by those funds.  March cotton settled up 9 ticks at .6159, while next December gained 10 points and closed at .6286.  Volume was once again on the strong side at approximately 30,000 contracts. It should be noted that the news from the USDA was somewhat friendly in that the agency cut the crop production in the US for cotton, corn, and soybeans from the December estimate.  Soybeans and wheat led the charge higher for the grain markets and corn managed to ride those coattails to a daily gain as well.  Lower usage and still healthy stockpiles of all commodities, not just agricultural commodities continue to serve as a low ceiling to prices however. Speculative fund managers are holding near-record positions in corn and soybeans, so we could see a decent short-covering rally at any point, but I wouldn't expect any rally to be sustained in the current climate.  The big news in commodities continues to be the extreme weakness in the energy sector.  Crude oil prices dipped below $30.00/barrel for the first time since 2003 and the after-effects of 9/11, the last time we saw a real meltdown in financial/commodity markets. Crude prices are barely holding above that level as the market heads toward the close.  This route in energy prices is without a doubt spilling over into our markets, but I would argue that energy bears have to be near the end of their big run.  Heating oil (aka diesel fuel) is currently trading at .9974/gallon on the screen.  I'm sure most of you are like me and thought we would never see prices this low ever again.  If I've learned one thing in watching almost 20 years of commodity markets: Never say never.  I get reminded all the time of my prediction that we would never see cotton prices below .70 cents again back when cotton prices were bouncing around between 1.00 and 2.00/lb.  It took less than two years for that prediction to be rendered foolish.  Both the stock market and the US dollar are posting moderate gains today, with the stock markets trying to regain some footing after an awful first week of 2016. 
Inside the Cotton Market
While the USDA gave us some numbers to chew on today, price action was once again pretty muted.  For the second consecutive day, prices tried to move higher before running out of steam around midday. As for the numbers themselves, we see a smaller US crop, with smaller domestic use and surprisingly static exports, which led to a slightly higher carryout as seen below.  

The world numbers, while still heavily burdensome because of the Chinese stocks that we have mentioned about 400 times in this space in the last three years, continue to improve thanks to a smaller crop worldwide last year. WASDE

As you can see above, the USDA cut more than 2.0 million bales from the December production numbers, with large reductions in Pakistan and smaller cuts in China and India.  It goes without saying, but if that 64.52 million bales could somehow disappear, we would be looking at an ultra-tight world balance sheet and likely be seeing prices considerably higher than the current .6200 that we are dealing with.  We still have to deal with the fact that consumption continues to decrease even as the world population increases; that reality is still far from bullish and plays right into my argument that we would have recovered this market share sooner had governments around the world not conspired to keep prices artificially inflated.  However, with such a large percentage of the free (yet really totally unfree) cotton in the world sitting in Chinese state warehouses, we were never able to really purge prices to the downside like we probably should have, and demand for cotton remains muted.  You have read all of this in this space before, I know. It should also be mentioned that polyester and other man-made materials can be produced really cheaply with $30.00 oil.  That doesn't help matters either.

As for the current market, it does seem that we have run into pretty good demand as prices have slipped toward the .6150 area that has been support for months now. With only 3.0 - 3.1 million bales of cotton outstanding in the United States, it would seem to reason that prices should start to try to work higher after these index funds finish their rebalancing act. It is widely believed that the trade has used this dip in prices to lift hedges as cotton finds its way into the spinning channels.  As far as marketing goes, it is my hope that any real gains will wait for Friday and into next week as the LDP payment is scheduled to move back above 500 points during that time frame. It would seem that next week, should we see a decent rally, would be a great time for growers to rid themselves of the balance of their unsold cotton.  I don't think there are many high grades left in this country and there certainly aren't many of them left here at McCleskey Cotton, but if you do have some, those might be the only bales I would want to hold on to as we aren't going to see anymore of them until next September at the earliest.  On the other hand, we have enough 42, 51, and 52s to fill up a container ship. He who rids himself of those first will likely laugh last.  We continue to look ahead to coming up with a marketing plan for the 2016 crop.  While I am marginally friendly toward the March, May, and July contracts, it is hard for me to make a educated call on December and March of next year. Virtually every guesstimate I have seen is calling for increased acreage here in the US and generally lower acreage in other cotton producing areas around the world. Of course, I would like to think that the 8.5 million acres of cotton planted here in 2015 will be the low water mark for years to come, so we hopefully have nowhere to go but up.  However, there are some respected analysts out there that think we will see acreage increase 1.5 to 2.0 million acres in 2016.  With good ground conditions in West Texas to start the season and the stagnant demand mentioned earlier, along with the fact that maximizing yields and quality are the best way to make a decent return; those ideas don't give me the most bullish feeling inside.  That said, we have seen that as long as the Chinese hold this amazingly large amount of cotton off the market, downside pressure is limited as well.  Therefore, for those that are relying on us to market your cotton for next year and despite the fact that option volatility is very low, we are considering selling December options, both calls and puts, to get started on our 2016 marketing plan.  This strategy would take advantage of a continued sideways market with a large amount of time value until we see a break from the current boxed-in range.  I will let each of you know personally, if and when, we decide that this might be a good idea for your particular marketing plan.  Right now, selling next year's production at .6286 just doesn't seem like the right way to go to start putting on short hedges.