Daily Market Update - August 27, 2014

 

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     

 

Dec 14 Cotton            .6772               .6658                .6746               + .0057           - .1097

Dec 15 Cotton            .7159               .7065                .7141               + .0045           - .0740

Dec 16 Cotton                                                               .7239               + .0048 

Sept 14 Corn               3.5650            3.5250              3.5600             unch                - .8750

Sept 15 Corn               4.0050            3.9725              4.0025            - .0025             - .6275

Nov 14 Soy                 10.3475           10.2200           10.2375          - .0425             - 1.1125

Nov 15 Soy                 10.4700          10.3350            10.3625          - .0400             - .9050

July 15 Wheat            6.0025             5.8950              5.9925           + .0450            - .4600

Wednesday's Market Report
 For the sixth time in seven sessions, cotton prices advanced and while the gains may be relatively small in nature, we are witnessing the first cotton rally in more than three months.  December cotton closed at .6746 today, up 57 points and at the highest closing level since July 23rd.  Prices also moved higher in the December 2015 and 2016 crop whereby we are getting very close to the grower netting .7000 for those crops.  The grain trade was very quiet today, especially in the corn trade.  December corn only traded a three and one-half cent range today which is the tightest in recent memory.  Prices for both September and December corn closed unchanged on the session. The market seems pretty content at this level as it waits for evidence of the huge yield that it is expecting.  With favorable weather ahead and no immediate threat of a freeze in the Northern states, I expect these yields to meet or beat the current expectation and for corn prices to resume their downward trend when the Midwestern harvest commences in a few weeks.  The soybean trade continues to be dominated by the September/November spread, but outright new crop November closed lower once again, losing four cents again today to close at 10.23 3/4.  As mentioned on Monday, all visible technical support on new crop beans has been breached and I think they will not be trading in double-digit values much longer.  Wheat prices did rebound some today, up three to five cents amid quiet trading.  The US dollar is lower and possibly working on some type of bearish reversal although all fundamental news on the table supports a strengthening dollar and today's weakness is probably due to profit taking more than anything.  The equity markets are very quiet, but still trading at traditionally extremely high levels. On a surprising note, the Congressional Budget Office predicts that the US Budget Deficit will shrink in 2014 to the smallest level since 2007, although they predict deficits to begin rising once again in 2016. 
Inside the Cotton Market
The cotton market continues to rally and is now some 550 points off the .6202 low, registered on the 1st of this month.  The rally continues to be fueled by the lack of selling and the short speculators that are throwing in the towel and having to buy back those shorts.  I would add that thought is out there that the crop in the US is getting smaller, but I believe that news is already in the market and those that watch production closely are pretty much on the same page.  Technically speaking, many will begin to talk about a monthly reversal on the charts and I assume barring a total collapse over the next two trading sessions, that thought is valid.  Many probably believe that the .6202 low will be "The Low" but I'm just not ready to join that camp, just yet.  In fact, we did see some growers start pricing some cotton today at .6750 to average with significantly higher priced fixations and I think that is a good plan.  Can prices rally back toward .7000?  Sure they can and by closing above all recent resistance including the 40-day moving average at .6637, they probably will. However, history tells me that having all your eggs in the basket at .6995 is not the smartest idea and staggered fixations seem to work better.  Why do I think that prices will have a hard time moving much higher than .7000?  Well, let's count the reasons:

1) The Commitment of Traders report shows that the trade (which represents farmer selling) is only 3.5 to 4.0 bales short on a crop that will be at least 16.5 million bales and ultimately could be 18.0 million bales.  At some point, these bales will have to be sold.

2) Many private estimates have the Indian crop two million bales higher than the current USDA projection of 29 million bales.  India, despite its contamination and somewhat lower quality, remains our biggest export competitor.

3) Good chances of rain exist for the West Texas Plains through the end of the week and a "general" 1-2 inch rain would quell any current and potential market rally.

4) US ending stocks will at least DOUBLE this year and world stocks continue to be at a historical record of 105 million bales.  If prices couldn't maintain above 80 cents with a 2.0-2.6 US carryout, where will the cap be with 5.0 - 6.0 million bales of carry?

5) I still believe that just like having to "get sick" in order to "get better", we will not see a true economic model-type recovery in prices until we see demand for cotton-only products return.  I don't think .6202 cotton made every mill in the world want to go out any buy cotton in large quantities for extended coverage.  At least, sales didn't reflect as much.

All of that said, I do think the market has upside in the short term (ie next 4-6 weeks) as merchants try to pry cotton out of farmer hands in order to satisfy October, November, December orders.  If the crop is late, things could get even dicier and prices could move further than I think they will.  But to a man, I haven't met one cotton person that can give me a reason for cotton prices to rally come late November, early December and into 2015.  Have your powder dry in the next few sessions or maybe the next few weeks to price the balance of your 2014 crop and probably to price some 2015 at prices that will net you .7000 or better.
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