Daily Market Update - December 15, 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

Mar 15 Cotton .6113 .6051 .6065 + .0011 - .1831

Dec 15 Cotton .6479 .6408 .6431 - .0019 - .1412

Dec 16 Cotton .6663 - .0015

Sept 15 Corn 4.2900 4.2250 4.2550 + .0075 - .3750

Nov 15 Soy 10.2700 10.0650 10.1150 - .0825 - 1.1525

July 15 Wheat 6.2275 6.0200 6.2025 + .1250 - .2500

Cotton LDP (through Thursday) - 5.55 cents

Monday's Market Report

Again, I apologize for the lack of entries recently but as you can imagine it is pretty hard to get a regular update out during this time of the year. In addition, most all of last week was spent out of town on business, so any attempt at an update would have been futile at best. While there is plenty to report from my absence, the actual cotton market is up a whopping 19 ticks from the last entry I made on December 4th, so as actual price goes for cotton, we haven't missed a whole lot. As for today, it was about as boring of a session as I can recall. The cotton market traded a whopping 62 point range and closed 11 ticks higher in March at .6065. New crop December settled lower on the day, down 19 points at .6431. Less than 10,000 contracts combined were traded on the day as the Holiday season is apparently taking an early start. The grain markets were mixed to start this work week with wheat stronger, soybeans weaker, and corn virtually unchanged. Wheat prices closed 11-12 cents higher and on 5-month highs amid technical buying that has that chart looking pretty enticing. July wheat closed the session at 6.20. We have seen a pretty good rally recently in corn futures, although those gains were not extended today during a very dull trading session. Last week's USDA Supply/Demand numbers were marginally friendly and the idea that we actually planted less corn last year than the Department continues to carry is supporting prices. I still see no chance of a corn shortage in our future and will look to price more 2015 production if prices continue to surge. Soybean futures were lower today by 7-8 cents, spurred by lower than expected November crush figures released this morning. Elsewhere in the commodity spectrum, all eyes continue to be wide and focused on the energy market, and specifically on crude oil futures, which hit a 5+ year low today at 55.02. Near buy crude settled at 55.31, down more than $2.00/barrel as bears continue to pile on as OPEC stated over the weekend that they have no intentions of curtailing supply, even as the market collapses. While this move lower in prices will ultimately be a boon for the US economy, right now the stock markets are not taking the news very well as it signals a current lag in the world economy and everything is reacting in a deflationary manner. The biggest question out there now is "What is Joe Q Public now going to do with that extra $20 he has in his pocket every week now that it takes $30 bucks to fill his tank instead of $50?" That is a massive increase in discretionary spending that is about to hit the US economy in some form or fashion. I know that I have been studying most of the day how to conservatively hedge some energy costs for the future here at the gin to lock these suddenly attractive diesel and natural gas costs in. Of course, the next question and more important question is "Where is the eventual bottom for oil prices??" And as I've said many times, if I had that answer, I certainly wouldn't be sitting here typing this update. I can tell you that $60.00 apparently wasn't the correct answer.

Inside the Cotton Market

As I said earlier, there hasn't been a whole lot going on with regard to the cotton market in the week-plus that I've been absent from this report. We did see prices move about a penny higher and have seen the upper end of the 59-61 range bumped every day for the last few sessions, but a breakout in either direction, we haven't witnessed. The biggest news since our last update was probably the USDA Supply/Demand report of last week which saw the Agency make a somewhat surprising 500,000 bale cut to the US crop, the predominant amount coming from the two largest cotton producing areas of Texas and Georgia, while leaving exports unchanged. This move tightened ending stocks here in the US to 4.6 million bales and while still somewhat excessive, the number is much smaller than last month's 5.2 million bale number. Unfortunately, the world numbers continue to just get more depressing. We saw consumption numbers decreased in places like India and Pakistan and now see world ending stocks at more than 108 million bales. To once again put that in perspective, we are forecast to spin 112 million bales of cotton in the world in 2014-2015, so for all intents and purposes, we have enough cotton in warehouses in the world for every cotton farmer on the planet to take next year off, not plant one seed of cotton, and mills would not run out of cotton. But therein lies the rub, we are starting to see that there is apparently almost two commodities within the single commodity of cotton these days. On the one hand, you have high quality, bright white, long, strong, premium micronaire upland cotton that continues to command a premium and is in somewhat short supply. On the other, you have either lower quality cotton, contaminated foreign growths, or bales that continue to get older and less desirable by the day locked away in the Chinese Reserve Program. For this reason, we need to see the World Price move some higher and thus the LDP some lower, to shake some of these higher quality bales loose from grower hands. With the LDP scheduled to drop by nearly 100 points this Thursday, the next 2-3 days are a prime opportunity if we could see the market jump by 100-200 points. The 100-day moving average at approximately .6300 still looks like an albatross on this market to me, although I have listened to very reputable market participants that think that a run back toward .6500 - .6700 could be in the cards. However, remember that a .6500 market with a 0 LDP is no different than a .6000 market with a 500 pt LDP. Should the market move back above roughly .6300 and higher, any LDP will eventually go away. While the USDA's move to shrink the US crop makes things somewhat bullish in the near term, I don't think it has much effect longer term. Most of my time last week was spent in Washington with those with the National Cotton Council and chiefly on their plate at the moment was the situation in Turkey. For those that don't know, the Turks have accused the US of "dumping" cotton exports into their country and are preparing to levy duties on US imports coming into their country. While thought to be totally unfounded, when compared with the obvious decision by China to drastically reduce imports in favor of using domestic supply and the rejuvenation of Mexican cotton production, you suddenly have three of the United States' largest export customers using far less US cotton going forward. If we continue to make 14-18 million bale crops and only spin 4 here at home, this cotton HAS to end up in the global stream. Perhaps I will be shocked when I see actual global planted acreage for 2015-2016 and some tell me that China is going to cut acreage by as much as 20%, but until I see it happen, I still don't see any REAL upside for this market. Can current crop move back to .6500 or even .6700? I suppose so, but what does that accomplish? We can essentially fetch that now with the market plus the LDP. Long story short, even if some might want to get bulled up about cotton, I remain firmly in the camp of bears until somebody can show me how we are going to magically turn 108 million bales of cotton into 98 or 88 or 78 or 68 or 58 million bales while maintaining near constant production going forward without a tremendously large fire somewhere in the world. You still have to take prices low enough at some point to encourage the stronger demand of cotton and we simply haven't done that yet. Taking prices higher certainly isn't going to do it; especially when the chief ingredient of your chief competitor (oil in polyester) is dropping faster than we could have ever imagined.

The biggest question on everyone's mind now is looking ahead to 2015 and what will happen there. For starters, a series of Farm Bill Meetings are going on around the state this week and next, and the meeting tomorrow happens to be in Dawson. I have attached the flyer associated with these meetings which are been conducted by UGA Ag Economists Nathan Smith and Don Shurley, the USDA FSA, and the USDA RMA. The meeting in Dawson tomorrow will start at 9:30 am at the 4-H Pavilion and lunch will be provided. In addition, the National Cotton Council will be hosting webinar on Wednesday going over the new cotton STAX program as well as other pertinent Farm Bill information. For more information on this, please go to http://www.cotton.org/news/releases/2014/webnar.cfm

Although I know just enough about his impending Farm Bill as well STAX to be dangerous, I will be in attendance for both of these sessions and will try learn more and relay those thoughts and ideas in this space going forward in the coming weeks.