Ag Market Update - January 25, 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           .6249              .6141             .6160               - .0085         - .0168

Dec 16 Cotton          .6274              .6184              .6197              - .0078         - .0275

Dec 17 Cotton          .6300              .6300              .6300              - .0043         - .0172

Sep 16 Corn             3.8625            3.8250           3.8475             + .0025        + .0950

Nov 16 Soy              8.9025            8.8075            8.8900            + .0525        + .0625

July 16 Wheat          4.9300            4.8550            4.9200            + .0675        + .0875     

 

Cotton LDP Payment - 4.99 cents/lb    

Today's Market Report
While I was out of the office late last week at the annual Southeastern Ginners meeting, the cotton market put in a solid if not spectacular performance, largely riding the back of a strong bounce in the energy markets.  Unfortunately, all of the goodwill gained on Thursday & Friday was erased today with interest as cotton prices were down 70-85 points, while oil priced slumped again.  March cotton settled at .6160, down 85 points while new crop December lost 78 points and closed at .6197.  Volume was much larger today than late last week at more than 27,000 contracts. In a somewhat ominous feature, the last contract of the day traded at .6141, and below the "line in the sand" support at .6150.  Cotton was joined in its dismal performance by its soft commodity brethren, as sugar and cocoa were lower on the day.  However, I would guess that cotton's performance was more influenced by the action in crude oil, which has slumped lower as the day has progressed.  Crude oil is currently trading at 30.27, down almost $2.00/barrel today after a sharp $6.00 bounce last week.  The equity markets are starting the week on a negative foot as well, with the Dow and S&P down 0.7% and 0.9% respectively. The US dollar is also lower today, but remains fairly stable in the .9900 - 1.0000 range.  The grain markets continue to trade with a firm tone, as soybeans and wheat both closed moderately higher today.  Corn prices were essentially unchanged.  As you can see in the YTD numbers above, corn, soybeans, and wheat have all had small gains during the first month of the calendar year, while cotton prices have slumped.  If this trend continues, the increase that we have projected in cotton acreage in the United States will start to shrink and possibly go away all together if we see the gap continue to widen. We've said it seemingly 100 times in the last year, but every time we start to get encouraged about cotton prices, a day like today brings us crashing back to reality. 
Inside the Cotton Market
 Pretty brief comments here today, as we touched on most of our thoughts in the paragraph above.  Our market continues to be pulled between bullish and bearish forces and today the bearish forces prevailed.  It is not a coincidence I used that same line in my last update on Tuesday of last week, the only change being the bullish camp emerged victorious that day.  Some of the weakness today could be attributed to market participants taking advice from certain people to take bearish option exposure should the plan by the Chinese government to rid itself of its reserves be more aggressive than expected.  While we still don't know the particulars, some rumors and innuendo is starting to trickle out of Beijing, starting with a larger amount of cotton offered and at a price more in line with world values, but until we get confirmation, this is all still speculation.  We did enjoy the presentation of Joe Nicosia, head of Allenberg Cotton and probably the preeminent voice in the cotton market today, at our meeting in Savannah, where for the first time in a couple of years, there was a air of slight optimism in the room after his presentation.  While he is worlds more knowledgeable about the numbers and their effect than we are, the idea of smaller world crops and lower ending stocks played into our report from last week, in that they should be supportive of prices down the road.  However, a real sustained rally is still probably 18-24 months away unless we see some sort of real crop disaster in the world.  And I do mean a REAL disaster.  Crops in the US, China, India, and Pakistan have all been reduced, sharply in some cases, since last August and prices haven't reacted favorably at all just yet.  However, the trend in ending stocks is now in a favorable position going forward.  

Another negative force weighing on current old crop prices is one that we are seeing here at McCleskey Cotton.  Until I did a hard examination of the numbers today, I didn't realize how much cotton we still had left to sell as we sit here on January 25th.  At this point last year, we had sold (or transferred receipts to Cooperatives) all but 4% of the 93,000 bales that we ginned in 2014.  Today, we still have 22% of the 86,000 bales ginned this year to sell.  If this is commonplace at gins across the cotton belt, there is still some selling pressure to be felt as these bales find their way into the pipeline.  For now (and it seems like we've said this 100 times in the last few months), we will have to see if the .6150 area of support will hold.  I still believe that prices can work higher from here, but today's close is indeed an ominous looking one.