Ag Market Update - March 21, 2016


by Ron Lee


Highway 118 West, PO Box 171

Bronwood, GA 39826




Agricultural Settlements

Commodity                 High                 Low                  Close               Change            YTD     


May 16 Cotton          .5858              .5706               .5817             + .0101          - .0594

Dec 16 Cotton          .5796              .5689               .5791             + .0101          - .0681

Dec 17 Cotton                                                         .6053             + .0095          - .0392

Sep 16 Corn             3.7950            3.7550            3.7925            + .0250          + .0400

Nov 16 Soy              9.1650            9.0450             9.1325            + .0350          + .3050

July 16 Wheat          4.7900            4.7100             4.7325            + .0300          - .1000


Cotton LDP Payment - 7.24 cents

Today's Market Report
Prices for agricultural commodities have been firm for the most part to start this week as all four of the main commodities we watch: cotton, corn, soybeans, and even wheat posted solid gains on this Monday.  After getting a strong push lower, cotton prices in both old crop and new crop offerings settled with triple digit gains.  May cotton settled at .5817, while December finished at .5791, both up 101 points.  Corn, soybeans, and wheat all gained 2-4 cents today as an early spring cool down brings some worries for wheat growers and continued planting delays in the Delta states keep corn and soybean prices firm.  While the two week forecast looks some better for these states, a rapid improvement in conditions for planting is not yet widely expected.  Some of these areas are getting toward the end of their prime planting window for corn.  However, we get these planting scares each year and more times than not, they tend to be marketing opportunities.  That is one reason for the corn and soybean recommendations below.  We are within a nickel or so on the corn, and while we pulled the trigger a little too early on soybeans it would appear, that market is going to have significant resistance here at the 200-day average and I think this a good place to get some sales on the books if you are growing soybeans.  It is my understanding that there won't be many beans here in the Southeast because of an extreme lack of supply.  However, in places where soybean acreage actually matters (Georgia doesn't), the sudden increased value of soybeans to corn and the fact that more Delta land will be dedicated to beans makes me wary of being long soybeans for too much longer.  Outside markets are quietly higher for the most part today.  The stock markets continue to do well, while the dollar has stabilized some since last week's big break. Crude oil and its by-products continue to trade constructively.  Crude oil is suddenly comfortable in the $40.00 range as Saudi Arabia and Russia are still planning to freeze output (albeit at still high levels) with Qatar and Venezuela apparently on board as well.  The big loser today has been in the livestock sector with cattle and hogs both down considerably after technical breakdown late last week. It would appear that after a very rough first quarter for commodities and stocks, the future looks some better going forward.  Still with high inventory levels of almost anything you can think of, gains will still be slow and sluggish without production problems along the way. 
Inside the Cotton Market
Well, it was still rather vague but we did get a bit of clarification regarding the Chinese Reserve Policy late last week.  You have probably read the specifics (or lack thereof) since our last update but the bullet points are featured below:

     * The auction is scheduled to launch sometime during the last half of April.
     * Total quantity up for auction is not yet decided (current rumor is 8-9 million bales)
     * Imported cotton will be auctioned first, supposedly 75% of what is left is US cotton
     * The "new normal" is that the reserve auction will continue until new crop is harvested 
        and ready for sale, which means no auction from Sept through Feb is likely
     * Floor price for the bales will be based on an international price, but the exact calculation
       was not revealed (once again).  Assumed to be based on the A index or a combination
       of the A index and their internal CC index.
     * The import quota system will continue to ensure high quality cotton can be imported
     * Quota increases are likely only when there is a crop disaster and/or short supply in China
     * It should be expected that it will take 5 years to digest the state reserves to a reasonable
     * It is possible that a limited volume of high grade cotton from the 16/17 crop might be 
       purchased for the reserve to insure a range of qualities (infer a range of crop years)

While this news is still somewhat sketchy, it does appear that the "atom bomb" of the idea of exporting this cotton is, for now, off the table. Being already in the hole over $30 billion dollars and still essentially long 50,000 contracts, it really didn't make sense for the Chinese government to do that in the first place.  Of course, anytime you are dealing with the word "government", well you know the rest....It should be noted that prices on the Chinese exchanges have risen steadily since the news was revealed.  While many in the trade feel that Chinese-based speculators are still short and (for now correct) on the US-based ICE exchange, I don't see any reason for this news to, in and of itself, to move the market lower.  We did move considerably lower on Friday, but I attribute that to move to massive loan redemption selling in the wake of a very positive market + marketing loan gain (LDP) combination late last week before the LDP went down on Friday. We recovered nearly all of those losses in today's trading session.  According to Cotlook, the release of the Xinjiang target price was also released over the weekend and came nearly three weeks earlier than expected at 18,600 yuan per tonne.  If my math is right and it very well might not be, that support price is roughly $1.30/lb.  At $1.30, the level is reduced from last year and is expected to result in reduced plantings this year!!  Just typing that makes me giggle.  I sit here wondering what we would be doing if we planned a $1.30/lb target price for our growers other than getting lawyers lined up to fight another WTO case.   The next obvious focus for the market will be to see how those sales go once they get started and how acreage ends up coming in, in the Northern Hemisphere, specifically here in the US.  While we are expecting acreage to decrease some here in our trade area with increases in both corn and peanuts and possibly in the state of Georgia, everyone with a guess sees US cotton acreage expanding this year. With the grain planting delays in the Delta states, some more of that ground could move to cotton and increased cotton acreage was already predicted there.  Lower sorghum prices also indicate increased plantings in Texas although growers out there are reportedly going out of business monthly if not weekly.  Informa Economics suggested 9.5 million acres of cotton late last week, while I still think a number closer to 9.0 or 9.1 is more likely. With this likely increase, while I remain bullish, a ceiling is probably still in place until we know far more news.  However, a return to the heart of the old 14-month trading range (62-64 cents) is expected here, eventually.  Remember speculators are at historical levels on the short side and convinced prices are going to go lower.  A close above .5890 would be the first hint for them to head for the hills. For those chart monkeys out there, we also put a pretty good reversal indicator on the weekly chart last week, provided we can close higher this week.  Today was a pretty good start toward that objective.  
Hedging/Speculative Corner

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 3/16/16

Hedge 25% of soybean production by buying the 8.80 put and selling the 9.80 call for a 10 cent debit. (Hedge) - Filled 3/16/16

Hedge 20% of corn production at $3.86/Sept or $3.95/Dec (Hedge) - Open as of 3/16/16

Buy 3 May Cotton at .5765 (Spec) - Filled 3/18/16

Sell 1 June Live Cattle at 1.2895 (Spec) - Open as of 3/21/16

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.