Ag Market Update - March 16, 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     

 

May 16 Cotton          .5851              .5752              .5832              + .0008          - .0579

Dec 16 Cotton          .5795              .5715              .5794              + .0025          - .0678

Dec 17 Cotton          .6080              .6080              .6082              + .0002          - .0363

Sep 16 Corn             3.7850            3.7600           3.7750             - .0125           + .0225

Nov 16 Soy              9.0525            8.9675           9.0450             + .0175          + .2175

July 16 Wheat          4.8425            4.7725           4.7875             - .0575           - .0450

 

Cotton LDP Payment - 8.20 cents/lb 

Today's Market Report
Not much activity in our agricultural markets today as all eyes were on the monthly meeting of the Federal Reserve and the conclusions that emerged from that meeting.  Cotton prices, which have firmed as predicted in our absence over the last week, finished fractionally higher on the day.  May cotton closed at .5832, up 8 points, while new crop December was up 25 at .5794. The May close was the highest in nearly a month (.5869 on 2/22) and the charts look constructive for cotton.  The grains were quiet and mixed on Wednesday as weather premium continues to keep a slight firmness under the corn and soybean markets.  Both markets finished within a penny either way of unchanged on the day, while wheat once again was the under-performer, losing more than a nickel.  I think for grain marketers, we are getting close to a point where you want to price a portion of your 2016 corn and soybean production and have made a recommendation in the new section of the letter below.  Soybeans are back above 9.00 in November and are soon to be fighting significant headwinds from a huge South American crop and the fact that currencies in Brazil put their growers at a huge advantage when exporting their soybeans versus our domestic beans. Increased ethanol production and margins in the face of finally-rising gasoline prices is lending support to corn prices but any rallies toward $3.90 and certainly $4.00 should be used to price a portion of your 2016 crop.  As for the Fed, the Board left the target benchmark rate range unchanged at 0.25% to 0.50% and warned that flagging economic conditions may keep the previously forecast increased from coming as quickly for the balance of 2016.  However, our stance certainly portends a sign of strength, or at least "the best of worse" as Japan continues with negative rates, China lessens bank reserve requirements, and the EU announces another round of aggressive stimulus.  After the announcement, we have seen the dollar index drop some 100 points to 95.65 and back toward the yearly lows in the dollar.  Wall Street liked the news as the Dow Jones is currently up 115 points and at 17,325 is within decent range of the yearly highs in the Dow.  It has been a very impressive, nearly 2000-point, straight up rally in the Dow over the last month.  For those that were preaching doom and gloom when the Dow was at 15,500, this would seem like a heck of a spot to initiate a short position.  Other news of note today was President Obama's selection of Merrick Garland to replace Anthony Scalia on the US Supreme Court.  The Republicans have vowed to block this nomination until after the Presidential election in the Fall, which is shaping up more and more to be a battle between Donald Trump and Hillary Clinton after both's impressive showing in the Super Tuesday II primaries last night, in what promises to be one of the nastiest Presidential elections in US history should this match-up come to pass. 
Inside the Cotton Market
There has been little fundamental news in our stead regarding cotton over the last week, but the market has done better nonetheless.  We are still awaiting news on the Chinese Reserve auction program and policies, but believe that announcement in imminent (with 48 hours).  I believe that this policy will not be overly bearish to the market and the cotton will be offered at price levels unsatisfactory to mills in China, much less the export market.  While we wait for the official announcement, the market is trying to tell us that it believes that the worst is probably in, at least for now.  The clarity of the announcement will help the market potentially move higher in the short term, although the fact that the huge slug of cotton still exists will likely keep a lid on prices to a certain extent.  However, with the speculators having the largest short position in cotton futures in recent memory, a purge of those positions could make the market pretty volatile to the upside, if this prediction comes to pass.  While we obviously should have put these positions on last week, a recommendation to take advantage of a upward movement in prices is listed in the section below.  For those of you with Revenue Crop Insurance, buying calls when prices are 400-500 points below the coverage level is pretty sound marketing in my opinion when the technical picture looks better than it has in some time. The other factor on traders minds will be the actual planted acreage in the United States this year.  That number, like most years, continues to be a moving target.  With the torrential flooding in Arkansas, Mississippi, and Louisiana last week and more rain scheduled this week, it stands to reason that some corn land in those areas might not get planted.  However, with soybeans making a move higher, will that land ultimately end up in soybeans or cotton as previously believed? Some of those decisions are still yet to be made, I presume. Here in Georgia, if you ask ten different growers about cotton, you are likely to get 10 different answers.  Some are increasing acreage, some are staying constant in their acreage, some are reducing acreage, and some are doing away with cotton all together.  It looks like peanuts will once again rule the acreage battle in Georgia due to the benefits associated with the current Farm Bill through the high target price.  My guess is that cotton acreage will be down slightly in Georgia in 2016 at 1.1 million acres, down 5% and pretty much in line with the Cotton Council's guess back in early February.  I think the Council's guess of 9.1 million acres is probably closer to impending reality than the USDA's 9.4 million acres.  It's hard to type this when you need volume to pay for a ginning operation, but further cuts in acreage could help further in the effort for prices to rebound.  For the first time in some time, I feel that it's time to be a tad bullish toward the cotton market. 
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Hedging/Speculative Corner
Adding a little spice to this previously mundane report as we go forward by making several ag-related commodity recommendations. Mainly just for fun and tracking, but I promise I won't just be throwing darts at the screen with a blindfold on to make a suggestion. Some will be legitimate hedging recommendations, while others might be totally speculative in nature.

To hedge insurance gains and to take advantage of a potential higher move in cotton, buy the July 60 call for 152 points. (Hedge) - Filled

Hedge 25% of soybean production by buying the 8.80 put and selling the 9.80 call for a 10 cent debit. (Hedge) - Filled 

Hedge 20% of corn production at $3.86/Sept or $3.95/Dec (Hedge) - Open

Buy 3 May Cotton at .5765 (Spec) - Open 


These recommendations are the sole opinion of the author and should be taken as such. Futures and option trading involves a potential substantial risk of loss and is not for all persons.