Ag Market Update - January 6, 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           .6268             .6186               .6200             - .0068           - .0138

Dec 16 Cotton           .6400             .6335               .6363             - .0063           - .0109

Dec 17 Cotton                                                         .6431             - .0042           - .0014

Sep 16 Corn             3.7125           3.6700             3.7050            + .0050          - .0475

Nov 16 Soy              8.8175           8.6800             8.7800            + .0300          - .0475

July 16 Wheat          4.7875           4.6975             4.7500            + .0075          - .0825

 

Cotton LDP Payment - 3.30 cents/lb  (estimated at 4.48 cents next week)

 

 

 

 

 

Today's Market Report
Uneasiness in the Far East once again put our markets here in the US behind the 8-ball today, as Chinese economic growth and the idea that Northern Korea is starting to monkey around once again with nuclear weapons rattled traders.  The US Dow Jones futures are currently down almost 300 points but have managed to limit those losses thus far today.  Cotton futures took the same negative cue and closed lower once again today with the spot March contract down 68 points, closing at .6200, the lowest close for the March contract since November 24th. New crop December settled at .6363, down 63 points, and thus far continuing to dissuade growers from planting cotton in 2016.  Grain markets started off on the defensive, but put in a late rally to finish generally fractionally higher on this Wednesday. However, ample supplies and general pessimism surrounding the global economy continues to limit gains for most all commodities.  Crude oil extended losses once again today, with the spot contract down more than $2.00.  January crude oil is currently trading below $34.00.  Futures prices for both unleaded gas and heating oil are within striking distance of $1.00/gallon as the holiday travel season winds down.  At some point, the risk/return of new shorts in the energy sector can't be all that wise, but it appears that point hasn't been reached yet.  As mentioned earlier, the markets got off to an uneasy start as North Korea claimed to detonate a hydrogen bomb as part of its nuclear testing program.  US officials were said to be skeptical regarding the legitimacy of a hydrogen bomb.  Nevertheless, the wackos in North Korea have added to an already uneasy feeling with regards to the global political structure.  
Inside the Cotton Market
Cotton prices fell once again today amid good volume (estimated 32,000 contracts) as the technical picture grows negative and the anticipation of index fund rebalancing, which should involve the selling of some 7,500 net contracts weighed on the market.  The market is once again approaching the .6100 - .6150 level which has held on separate occasions during the range bound trading we have experienced this season.  The cotton market is currently experiencing the same type of trading that we saw last year in January, where we played defense for nearly the entire month, bottoming on January 23rd at .5705 before rallying more than 1000 points in February.  I have long been a proponent of the market needing to move lower in order to stimulate demand, but statistics seems to indicate that ending stocks in the world outside of China continue to be a tad too tight for this too happen just yet.  It all depends how hard the speculators come after cotton from the short side in the next few days, but right now the trade is letting them come to them to buy back their short hedges.  I don't believe that we will see this market trade with a "5" in front of it again, but eventually, we are going to exit this tedious range, one way or the other.  For now, we would prefer buying this market at .6150 and lower. As we mentioned in our first correspondence of the year, cotton actually outperformed almost all commodities in 2015 (as hard as that is to believe).  The following article gives the opinion of what cotton will do in 2016 from several of the noted trade houses across the globe. http://www.agrimoney.com/feature/cotton-futures---will-they-outperform-again-in-2016--415.html#cotton Most of these are looking for another year of predominately flat prices for cotton.  It is hard for me to make a solid prediction without knowing a) Chinese policy for both their domestic growers in 2016 as well as their plan for the Strategic Reserve, b) Acreage ideas, mainly here in the United States, but to a lesser extent, China and India, and c) weather patterns, mainly for West Texas, during the upcoming growing season.  Right now, I think A leans bullish, while B & C are likely more bearish.  As for hedging next years bales, I don't think 63 or 64 cents is a place where we want to start without a seed in the ground in the Northern Hemisphere for at least two more months. Give me that 1000 point move higher that we saw last February and we will certainly be giving strong consideration to doing so, however.  Speaking of acreage, the first informal poll of US cotton acreage was released yesterday by Cotton Grower magazine, which indicates that cotton acreage will be moderately higher in 2016, moving from 8.55 million acres in 2015 to 9.08 million acres in 2016.  I would have to say that I disagree with their assessment of Georgia acreage which they have at a 50,000 acre reduction to 1.07 million acres.  I fully expect cotton acres to be higher in Georgia this year, probably closer to 1.25 million acres, as growers simply can't continue to over plant peanuts and corn/soybean prices continue to deteriorate. 

We will watch this market keenly over the next couple of sessions to see if the .6150 area can contain prices.  If we slip below there, things could get a little bit sloppy but I fully expect the cotton trade to aggressively cover hedges as we approach .6000.  For those of you with cotton still to sell and I believe there is still quite a bit of cotton in grower hands, continue to let the LDP be your free "put option" as prices move lower.  We are looking at the strong possibility of the LDP moving back toward that 500 point area, where we have successfully taken the payment and immediately sold cotton once the market started to trend back to the middle/upper portion of the range.  Be ready to do this exercise once again if/when the opportunity presents itself.