Ag Market Update - December 8, 2015
by Ron Lee
Highway 118 West, PO Box 171
Bronwood, GA 39826
Work:229.995.2616
Mobile:229.881.3903
ronlee@mccleskeycotton.com
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| Commodity High Low Close Change YTD Mar 16 Cotton .6523 .6403 .6481 + .0037 - .0064 Dec 16 Cotton .6595 .6525 .6590 + .0019 + .0012 Dec 17 Cotton .6500 .6500 .6528 + .0037 Sep 16 Corn 3.9325 3.8550 3.8875 + .0025 - .3925 Nov 16 Soy 9.0125 8.8900 8.9650 + .0125 - .9550 Jul 16 Wheat 5.0275 4.9300 5.0075 + .0800 - .9625 Cotton LDP Payment - 4.05 cents/lb. Estimated at 2.96 cents/lb. next week |
| The November USDA Supply/Demand report came and went today and as you can see by the settlements above, there was much ado about nothing once the numbers were posted. Speculators have been on a cotton buying spree in the last several sessions and bought another chunk today, taking prices to the highest closing level (.6481) since August 21st. The cotton figures today would be considered neutral to fractionally bullish and I will touch on those in the next section. The grain numbers were even less mundane as what minor changes that were made were well within the expectations of traders. Soybean and wheat balances were left unchanged from the November numbers, in fact. I can't remember the last time that both corn and soybean futures settled within a one cent range from the prior's day close on a "report day". The biggest mover today was once again the US dollar index which has taken out last week's low and accelerated to the downside and in now down to 97.45 after firing plenty of bullets above 100.00 last week. If this washout to the downside does continue, we should continue to see our row crop commodities be supported in price. Crude oil prices continue to play defense despite the lower dollar. I still believe at some level the risk/reward benefit for energy bears isn't worth it at these tremendously low levels given all of the hostility surrounding global politics. For those that use a large amount of energy related products such as diesel fuel, it sure looks like a proper time to stock up on supplies if you have the money/storage or to buy futures/options if that is your preferred method of hedging. Cattle prices are once again falling, closing limit down and at the lowest level seen since June 2013. We aren't right about much and it took longer than I expected, but the cattle market in 2015 is going to look nearly identical to the washout from $2.00 cotton that we saw in 2011-12. High prices will always cure high prices. I would certainly expect live cattle prices to approach $1.00/lb in the coming weeks and months. |
As mentioned earlier, the USDA data for cotton today was pretty in line with the expectations of the trade as we saw both US production and exports lowered and an ending stocks figure that was fractionally lower than the November estimate.
The slightly bullish feel is when looking at the Ending Stocks number today compared to this time a year ago, which is 700,000 bales less. Consequently, this time one year ago we were trading a March futures price of 59-60 cents, whereas today that range is 64-65. By that estimation, I would say that futures are pretty fairly priced. I will eat some crow in that I always thought the crop was bigger than the USDA, which helped fuel my bearish tone, along with what has been reported to me as dismal demand. However, the 13.0 million crop is now widely and generally received as correct for the US output. I will say that I do believe that somewhere between 400,000 and 600,000 additional bales were out there on the stalk but taken away by Mother Nature via El Nino. I, along with others, were apparently wrong about the West Texas crop as it will ultimately come in shorter than anticipated. I will be very interested to see the the final numbers out of West Texas and why the disparity between the crop condition and yield estimate existed all season. These tighter stocks here in the US probably, but not certainly, mean that the prices that begin with a "5" that we predicted earlier in the year will not come to pass.
Looking at the world numbers, we continue to see the tremendous world carryout, slowly but surely coming down. The USDA reduced the crop in both China and Pakistan as expected. 
Ending stocks in the world are now being estimated at 104.39 bales, down almost 8 million year over year. The biggest sticking point lies in the USDA consumption number of 111.39 million bales, which many in the trade seem to think is overstated. Never the less, the Ending Stocks number OUTSIDE of China is historically very tight and would traditionally imply much higher futures prices and I'm talking 80-90 cent cotton.....except for one thing.....there's still that albatross of 65.02 million bales in China, most of which that continue to sit and age in warehouses. What will they ultimately do with these bales? We have been asking that question for almost three years now with no good resolution. And as we see the yarn spinning mills move out of China, but shifted into Bangladesh, Indonesia, and Vietnam that question becomes even more complex. We will likely not know the 2016 plan for the selling of the reserve bales for another couple of months, which will continue to provide uncertainty to our market.
Back to the current futures market, we have seen the speculators pile in once again on the long side of cotton over the last couple of weeks since prices bottomed in the .6150 range. I have no idea what gets them so enamored with our commodity but they have moved the needle on Open Interest to near, what in the past has been, a breaking point. Right now, a good number of these positions have a nice little profit associated with them. Of course as they buy, there has to be a seller, and while there are a few Speculative shorts, the trade continues to sell into this rally. I would guess that cotton prices could move toward the old highs of 6650 to 6700, but I just don't know how many more bullets the Long Spec community has to fire. One thing to always remember is that those guys have more money than the trade has bales of cotton. It is probably to the long spec's advantage in that we are just coming off the December notice period and not bearing down on the March notice period where, with almost full carry on the board, I would believe a LARGE amount of ultimately undesirable cotton will find its way to the board. The specs might have a lot of money; I'm not sure what use they would have for several hundred thousands of 42 and 51 grade cotton instead of that money. Technically the market does look strong and ultimately we will have to escape from this 16-month 59-68 price window. It very well could be a Northerly exit from this range; I just don't think the market is ready to do that just yet however.
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