Ag Market Update - January 6, 2015

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 .6125 .6010 .6020 - .0051 - .0007

Dec 15 Cotton .6531 .6436 .6440 - .0054 - .0002

Dec 16 Cotton .6588 - .0070 + .0010

Sep 15 Corn 4.2650 4.2000 4.2275 - .0075 unch

Nov 15 Soy 10.3150 10.1650 10.2875 + .0375 + .2325

July 15 Wheat 6.0900 5.9275 5.9875 + .0275 + .0125

Cotton LDP Payment - 3.26 cents Next week's estimate - 4.86 cents

Today's Market Report

First of all, Happy New Year to everyone, I hope that it has started off as everyone has wanted. This is my first update in more than two weeks as the holiday season combined with a rush to finish ginning/marketing a crop has left me with little time to produce an update. Luckily, at least in cotton's situation, the market has been about as dull as watching paint dry over that time period. I have also renamed this update the "Ag Market Update" as opposed to the "Daily Market Update", because over the last few months it has been far from a "daily" update. I may eventually go to a weekly update, but for now I will still try to do 2-3 updates per week as the market gives us news to report. So with that, let's see where the markets have been and where they may be going. As I mentioned earlier, cotton prices are still stuck in a firm .5900 - .6200 rut, and have been for essentially two months now. Today, March settled at .6020, down 51 points on the day and almost smack dab in the middle of said range. While this is only the 3rd trading day of the month, you can see above that prices are all but identical to where they finished in 2014. Next year's prices, basis December, settled at .6440, down 54 points and also right in the heart of the recent range. Grain prices have been mostly higher in 2015 and soybeans and wheat finished that way today. Soybeans gained 8-11 cents and wheat jumped 2-4 cents. Corn prices were higher most of the day, but settled with fractional losses of a penny or so. So for now, with all the wheat planted, looking ahead to 2015, the battle for acres seems to be on between corn, soybeans, and cotton. I am assuming a substantial jump in peanut acreage, simply due to the New Farm Program whereby the target price for peanuts is extremely more attractive than that of the other commodities, especially cotton, which doesn't even receive a target price in the new program. More on that later and in coming updates. The huge news in the commodity sector since our last update is, of course, in the energy markets. Crude oil is now trading below 50.00/barrel, unleaded gas at the pump is below $2.00 and falling like a rock, and even diesel fuel is begrudingly starting to move lower. While this move is suddenly having an adverse effect on the stock market and those holding equities, it is the greatest economic stimulus for the average Joe in more than 5 years. Prices may continue to fall as Arab nations still haven't blinked on a production cutback and new energy sources in North America are quickly creating a glut at home as well. Where will prices go? I tried to quit predicting prices long ago, but on the monthly chart, crude oil doesn't have much support left until the $32-$35/barrel range. I certainly feel as if we will at least test the lower $40's on crude, which should result in gasoline prices approaching $1.50 sooner rather than later. While this is all well and good, those of you that are farming for a living are surely asking, when are lower energy prices going to result in lower fertilizer prices? That is a very valid question in my mind. As I mentioned, stocks have gotten off to a rocky start in 2015, as the collapse in oil prices has investors worried about the global economy as a whole. While a late rally today helped the Dow end in the green today, it was five consecutive down-days before today.

Inside the Cotton Market

The cotton market continues to be like a 6'0 basketball center giving a series of head fakes...nobody is buying them, or in some cases selling them. After running up toward .6300 just before Christmas, the market crashed pretty hard ahead of New Year's, down toward .5950, before buying showed up after the New Year's holiday to push prices back toward .6125 before losing steam late in the session today. In other words, we are going nowhere fast. We do hear that the index funds will have to buy some 6,000 - 7,500 contracts beginning sometime in the latter part of this week as they rebalance their "basket of goods" to start the new year. One would assume this to be a bullish bullet point for the market except that everyone knows it's coming and then who is there to buy the market once they are finished? In addition, it appears that the Indian government is going to attempt to begin liquidating their recently acquired state-owned cotton at a price that will likely not be attractive to prospective buyers. Where will this price need to be for this cotton to be competitive? They have vowed not to keep this cotton for a long period of time like the Chinese have become known to do. Another bearish point of contention continues to be Turkey's absence on the export report as they pursue "anti-dumping" charges against the US for cotton imports. Probably the most bullish feature in the market right now is the potential shortfall in the West Texas crop and its slow movement to market due to the rough weather conditions out there at the moment. While the crop will eventually get picked and ginned, some think that the number of bales may fall well short of the current USDA estimate and at the very least will be discounted due to the quality. Combine that with the current port workers strike on the West Coast and the unwillingness of the Mid-South grower to part with cotton from the loan, the result has been a continued historically strong basis for the Southeastern grower, particularly on high grading cotton as we have mentioned in this space repeatedly. With the market in the 61-62 range, if the grower has "popped" his cotton at a 500-600 point level, it is not uncommon to receive well north of .7000 once his positive basis is applied to the equation. So just like I said for basically all of December, when the market + LDP + basis situation works for your individual case, go ahead and sell the balance of your cotton when you can achieve these levels. As the market rises, the LDP will shrink and it is all "six of one, half-dozen of the other" when that happens. The market would need to rally some 600-700 points for you to really see a difference otherwise, and I just don't see that happening. However, looking ahead to 2015 and in reading many market letters over the holidays, there appears to be plenty of folks out there looking for a rally in prices. I certainly hope they are correct, yet I just don't see the reasoning. If we get to June, and I see that worldwide acreage, as well as US acreage, has plummeted 20+%, then I might be ready to jump on their bandwagon. But for now, I simply don't see acreage contracting all that much, even with the expected peanut acreage increase. The first estimate of the year was released yesterday by Cotton Grower magazine, seen here http://www.cottongrower.com/cotton-news/cotton-grower-acreage-survey-growers-dialing-back-acres-in-2015/ , whereby they expect acreage to be down slightly more than 10%. My experience tells me that a cotton farmer, one that is frustrated with current prices, is probably either going to not respond to a survey or under-report his intentions for cotton in the hopes that it will scare the market higher. This survey leads me to believe that acreage will ultimately be cut by less than 10%. If this is the case, and if West Texas continues to recharge its soils with moisture, I see nothing out there that gets me excited about cotton prices going forward. And on top of that, I haven't even mentioned the likely drop in the cost of synthetic fibers, due the current crash in oil prices. Market wise, 2015 is shaping up to be a series of singles and doubles as opposed to the home run that the stubborn bear hit in 2014. If prices rally toward 67-70 cents basis December, and that is a big IF in my opinion, I would still recommend growers price a small percentage of their expected production on the better than average chance that an LDP will exist during the 15-16 marketing year. In that vein and I know I'm probably rambling, the single biggest challenge, IN MY MIND, that the cotton industry faces in 2015 is trying to convince the legislature in Washington to allow the use of certificates once again, or omit cotton marketing loan gains from one's $125,000 payment limit. In past farm bill's, this was not an issue but it certainly is now. Some people don't believe cotton can go to 40 cents again: I'm not one of them. Just say that it does and there is a LDP rate of 2000 points. Take your calculator out and see how many bales it takes at that rate to get to $125,000. Here's a clue, it ain't all that many. Some larger farms exhaused their $125,000 limit this year and the LDP never got larger than 600 points! And as I type this last bit, I am looking out the window at the last 100 or so bales to be ginned for the 2014 crop (finally!). I would like to take the opportunity to thank all of you that read this and are McCleskey Cotton customers for another successful season. It is certainly going to be a gigantic challenge to make 2015 even remotely as successful, but hopefully together we can make a pretty good run at it. Thanks again!