Ag Market Update - January 19, 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          .6293              .6130              .6247              + .0106          - .0081

Dec 16 Cotton          .6320             .6206              .6269               + .0022          - .0203

Dec 17 Cotton                                                       .6353               + .0030         - .0092

Sep 16 Corn            3.8375           3.7800             3.8200             + .0450        + .0675

Nov 16 Soy              8.9100           8.8500            8.8575             + .0050         + .0300

July 16 Wheat          4.9000          4.8150             4.8375             - .0075          + .0050

 

Cotton LDP Payment - 5.10 cents/lb    

Today's Market Report
Cotton prices had their best performance of 2016, coming on the heels of a three-day weekend whereby prices went into the break on pretty tenuous ground.  As we have mentioned in the few entries we've made this year that all markets have found themselves a tad gun shy as the equity markets and crude oil futures have had the rockiest start to a calendar year on record.  Crude oil prices, after trying higher earlier in the day, have once again resumed a downward path, and are currently lower by more than a dollar at $28.40/barrel. This retreat probably led to our row crop commodities not finishing the session any stronger than they did.  March cotton gained 106 points, settling at .6247, after making a pretty good attempt at the .6300 level.  Volume was once again very impressive at more than 37,000 contracts.  We are still seeing very little interest in the new crop December.  Neither farmers, merchants, or speculators seem to be interested in that contract at all with only 790 contracts trading today, and an open interest of just over 1,000,000 bales worth of cotton.  Corn prices continued to move higher, gaining nearly a nickel across the board today, and prices have risen approximately 20 cents from the $3.50 area that seems to be a good support level for the time being.  Soyebeans and wheat were both virtually unchanged from last Thursday's settlement price.  Informa did put out another round of acreage expectations today, with soybean acreage at 85.23 acres and corn acreage at 88.86 acres.  These numbers would imply an increase in soybean acreage of 2.5 million acres and a decrease in corn of 870,000 acres.  In other words, the weaker prices on the grain board have done little to discourage farmers from planting in 2016 according to this trade house. Probably taking the cue from Crude, Dow Jones futures have turned lower once again today and are currently down 65 points. For the month (and year), the Dow is down almost 9%.  Back to crude oil for just a second.  You can't find one single article out there that says anything remotely bullish about crude oil.  Sanctions in Iran are about to be lifted which would put them back in the export market as a supplier.  One article I read the other day said that water would soon be cheaper than oil.  Then yesterday, I read where one of the least desired types of crude oil in North Dakota was actually selling for - $1.50/barrel for a brief period last week.  Yes, you would have had to PAY SOMEONE to take your product.  I'm not the sharpest tool in the shed, but I believe that would lead me to cap those wells for the time being. I'm saying all of this to say that this reminds me of 2008 when you couldn't find a bearish article regarding crude oil.  We were going to run out of it practically every day and Goldman Sachs said it was a foregone conclusion that we would see $200.00/barrel crude.  Today, you aren't very cool if you aren't predicting $20 crude or even $10 crude.  Me, I believe it is time to start playing oil from the long side of things.  That one type of crude might have traded negatively but you aren't going to see Brent crude trade at negative numbers.  I'm thinking oil prices will start to inch higher sooner rather than later.  And that would be a positive reaction for all commodities, including cotton. 
Inside the Cotton Market
The cotton market continues to be in a tug of war between bullish and bearish forces, but for one day at least, the bulls seemed to have a better grip of the rope.  Since testing the .6150 low for approximately the last seven sessions, only to see the level hold, prices moved higher today, and gained 106 points in the March contract on what would be termed an "outside day up" technically.  On the negative side of things, we continue to see a contracting world economy, with China specifically continuing to be battered against the ropes.  Additionally, the unbelievably low price of crude oil has a more negative effect on cotton than maybe some other commodities, in the fact that crude oil is the chief ingredient of the man-made fibers that cotton is having such a hard time against in the retail arena. Last week, we also saw rumblings out of China that they intend to more aggressively rid themselves of the enormous State reserves that we have talked about for the last decade it seems like.  We still have no idea as to who has much interest in four or five year old cotton.  The mills in China are reported to not care for the cotton, and I can't see them being able to export the cotton unless they drastically reduce their offering price.  While the idea that they would try to reduce their holdings sometime during the early 2nd quarter of this year has been widely speculated in the trade, nobody still has a real good grasp on the path they plan to take.  It is starting to be more hypothesized that much of this cotton will ultimately just be either written off, used to stuff mattresses with, or perhaps make state uniforms.  If this it the ultimate end game for these bales, the tale becomes a little less bearish and plays into our idea that world ending stocks are now finally headed in the right direction.  We have seen evidence that this is the beginning trend regardless as crops in the US, China, India, and Pakistan are all getting some smaller as the production side of the marketing year comes to an end.   If you can remember back a couple of years ago, we said that as long as world ending stocks continued to rise, there was no reason to get excited about cotton prices.  Just the same, now that ending stocks are falling and countries like China continue to reduce their acreage as they plan to do in 2016, we should see prices start to at least moderate, if not move higher.  Unfortunately, the larger forces in the global economy which continue to predict gloom and doom will likely keep prices from moving substantially higher.  Right now, the market is acting almost identically as it did during January 2015.  Last year, we started the year negatively, bottomed on January 23rd and then gained almost 1000 points through the end of February as selling dried up and the idea that the US would plant the smallest crop in 30 years came to fruition.  I don't think anyone sees another 1000 point move coming with the global deflationary concerns along with the idea that US cotton growers will plant more cotton in 2016.  However, I certainly think prices are poised to move back toward the 200-day moving average at .6375 and possibly up toward .6500.  At that price level, I would certainly be free of any 2015 cotton that might remain if I were a farmer still holding some.  As for 2016, we still see no action to take with regards to beginning to hedge that crop just yet, other than selling some options as we traverse the range, like we mentioned last week.

Many of you have asked about the National Cotton Council's work in getting cottonseed declared as an "Other Oilseed" by the Secretary of Agriculture, in order to become eligible for a potential ARC or PLC payment.  It is my understanding that the Secretary is still weighing the pros/cons or even if he has the legal authority to do so without opening the current Farm Bill back up.  Most every person that has researched the legalities of the Bill seem to be in agreement that Secretary Vilsack does have the legal authority to do so.  Whether he will remains another matter.  The last indication I heard was that he was probably leaning against doing so, although his mind was not completely made up on the matter.  Nevertheless, with all of the support from farmers, bankers, and landowners, the USDA is certainly aware of the challenges facing the cotton industry in the wake of the WTO Brazil case and subsequent Farm Bill.  The STAX program is still in effect but was written when cotton prices were between 80 and 90 cents, and seems to have little substance when prices are mired in the 60 to 65 cent range with little or no volatility.  Even if the cottonseed declaration does not come to fruition this year, there seems to be a growing idea that USDA may provide some sort of assistance to those that GREW cotton in 2015, but how it would be rendered and how much would be provided is anyone's guess at this early stage.  Right now, we will simply wait for the Secretary to make his call, which he has repeatedly said would come very soon.  I would not be surprised if that answer came this week or next.  While I will learn more at upcoming meetings, I feel certain that the National Cotton Council would continue to push for the cottonseed declaration in future years, even if they are rebuffed this year.