Ag Market Update - February 3, 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 .6151 .5989 .6145 + .0156 + .0118

Dec 15 Cotton .6349 .6272 .6345 + .0078 - .0097

Dec 16 Cotton .6499 + .0066 - .0080

Dec 17 Cotton .6649 + .0066

Sep 15 Corn 4.0975 3.9300 4.0775 + .1525 - .1500

Nov 15 Soy 9.7850 9.4500 9.6625 + .2100 - .3875

July 15 Wheat 5.2325 5.0200 5.2225 + .2050 - .7525

Cotton LDP Payment - 7.01 (through Thursday) - Expect significant decline next week

Today's Market Report

We haven't seen one of these days in quite some time! Look above at the quotes and you'll see that today was the best performance by agricultural commodities in recent memory. As you might imagine, a further advance in crude oil and its derivatives led the commodity sector higher, but as we've mentioned in the last few updates, cotton has its own bullish fundamentals to stand on for the first time in quite a while. March cotton gained 156 points today, closing at .6145 and impressively above its 100 day moving average for the first time May 22 of last year. Today is the first day that I am inclined to believe that "The Low" might be in for cotton, at least as associated with the 2014-15 crop. New crop December was higher, but not as strong as the old crop contracts, gaining 78 points to settle at .6345. The grains were even stronger than cotton, but as much as they have been beaten down recently, that was to be expected on a day like this. Corn gained a whopping 15-16 cents, while soybeans were up 21-27 cents. Even ole, beat up wheat got into the bullish act, jumping 20-21 cents. As I mentioned earlier, the energy market was a big help to our commodities today, and it certainly looks like some sort of temporary bottom is in place for those energy products. It is certainly way too early to say that "The Low" is in place for these commodities, but the bears are finally taking notice for sure, as crude oil is some $9.00/barrel off the low, while heating oil (diesel fuel) has rallied more than 20 cents/gallon. Another helping factor today was some positive press out of Greece that indicated a move toward writing down their debt was probably not likely. This led to a clear "risk on" day as the Dow Jones gained more than 300 points after a couple of rough sessions and the dollar index was the clear loser on the day and to a lesser extent, the metal sector. While pessimistic sentiment is still clear for those looking to grow agricultural products, today at least makes things look a little better. Whether this is just a blip on the screen or turns into a seasonal "battle for acres" is way too early to call.

Inside the Cotton Market

After being clearly bearish for months now, the bullish argument we tried to pose via the impressive export sales performance of the last few weeks finally took root today. As mentioned earlier, the March cotton contract closed above its 100 day moving average for the first time since the Memorial Day rains came to West Texas and precipitated our steep decline in cotton prices. Are we about to shoot futures prices right back to 70, 75, or 80 cents? Not hardly, but the trade certainly has the clueless speculators on the run for the foreseeable future. These speculators that blindly sold cotton futures at 58, 59 and 60 cents when it was obvious we were selling the US out of high grade cotton are going to have to pay handsomely to flatten that position. And if we trade several days above the 100 day average, other specs that have been sitting on the bench will come back into the game for the Long team. Eyes need to now turn to India and see at what level basis US ICE cotton futures initiates them to sell a large portion of their MSP stocks into the export channels. Right now, US cotton, specifically long staple, high strength cotton is still very much in high demand. If you still have these desired lots, when you combine the March price, plus the positive basis, plus the LDP which will top out this week at 701 points, this is the best deal you have had come your way since July to sell your cotton. I think the market will probably move back to the .6250 - .6280 area that served as resistance back in late December fairly quickly. Should we breach that level, there is probably nothing significant toward we run into the 200 day moving average up around .6500. However, as we said in previous updates, this bullish phenomenon is likely going to be contained in old crop futures, and possibly just within the March contract. Any move out of the March will not be seen point for point in the new crop December contract. Just as today the March was higher by 156 points and the December higher by 78 ticks. The March contract traded hands 35000 times, while the December traded 2800 times. Until I see different, I believe December will be contained at the .6500 - .6600 level on this old crop surge.

I would like to take just a little space, well actually a lot of space, to speak to certain areas of the Farm Bill that we are all trying to decipher as we look to a 2015 growing season that, to be honest, doesn't look too inviting. And I'm willing to say that my point of view regarding the Farm Bill probably isn't a very popular one. The general consensus in this area, where cotton and peanuts are the predominant crops, is that the Peanut Lobby hit a home run, while the Cotton Lobby struck out with its bat never leaving its shoulder. In my opinion, that premise couldn't be further from the truth. Not dismissing what the peanut industry was able to accomplish, but to say the cotton group did nothing is just out and out wrong. First of all, I go back to what I said when the Farm Bill was first approved; going forward, we need to take whatever we get from the government and feel pretty lucky, given the negative feedback that agriculture receives from the press/media and the general clueless voting public as a result. As we move forward, the money received from the government is simply not going to increase. As the Ag Economist from Mississippi State, Keith Coble, told a group in Mississippi, "Don't get terribly wrapped up in thinking these programs are going to keep you in business if you have a really disastrous year. They are meant to supplement other parts of your risk management program. Given the cost of production, projected prices, etc., I wouldn't be distorting my planting decisions based on what I think the ARC or PLC payments are going to do for me. Everyone - producers and lenders- are going to have to be more sophisticated about managing risk." When I started writing this update in 2009, my reason for doing so was that I believed that the farmer that marketed his crop in a better way would have far greater success long term than the farmer that simply farmed around the government programs, and I think that idea is finally taking root. But back to the cotton vs peanut debate for a minute: The cotton lobby, specifically the National Cotton Council, did all they could do under the framework of the WTO Brazil case that has been hanging over our heads for the better part of a decade. Some say we should have just told the WTO to go jump in the lake, and while I agree to a large extent with that sentiment, it just isn't that simple. We were at the risk of having Brazil slap duties on everything from DVDs to pharmaceutical coming from US exporters had we not only complied, but changed the framework of the cotton portion of our Farm Bill going forward. It should be noted that it could have just as easily been soybeans or rice or any other commodity that Brazil targeted back in the 2000s, and with a peanut support price for the current farm bill at a level that is rather inflated compared to other commodity support prices, it certainly isn't out of the realm of possibilities that peanuts could be challenged within the WTO framework in the future. For the foreseeable future, it appears to me that we are essentially growing peanuts for the government under a program where we don't even know what the government payment will be. But back to the matter at hand, knowing we had to change, the cotton leadership did the best they could under the situation in my opinion. Is STAX a better program than the one we had from 2008-2013? Of course it isn't, it never was going to be. But it is probably going to be a lot better system than the grade its currently getting from growers at the moment. I don't know where the markets are going, but if we woke up in December and cotton prices were in the 40s, there will be more than one farmer kicking himself in the rear if he didn't pay $6 to $10 an acre for what would likely be a $100+ per acre indemnity. In years where prices are high, the choice to take STAX is a no-brainer. In addition, the cotton lobby was able to keep the cotton loan system (which provides for LDP payments) in place, along with allowing cotton base acres to be turned into generic acres, whereby growers with a large cotton base could still having some planting flexibility throughout this farm bill. Now the cotton lobby is going to try and convince Congress that LDP payments should be exempt from payment limits via the Loan system and the thought is that we could possibly have some success in this attempt. I just wanted to refute a few of the misnomers going around about the Farm Bill and particularly, cotton's involvement in it. In my opinion, a cotton grower needs to learn not only everything they can about the STAX program, but the different products offered via crop insurance these days. I would almost wager you that there will be a year in this Farm Bill where the STAX indemnity payment pays for all of the other years that you pay in premiums. Will it be this year? Probably not, but for the low premium cost, I'm not going to try and outsmart the market, I'm going to buy the coverage. This Farm Bill just makes it almost necessary that we see large market fluctuations as acreage moves up and down and when combined with the uncertainties of Mother Nature, I think it makes purchasing STAX insurance a given. It will on our farm.