Good afternoon friends!
Corn (H17) 366’6 -1’4
Soybeans (H17) 1035’4 -1’2
Chi Wheat (H17) 434’2 +’4
KC Wheat (H17) 443’4 +3’0
Cotton (H17) 76.85 +.41
Im checking back in this PM to talk about a cotton! The market has gone parabolic of late, with all contracts out to Dec 17 testing the summer highs. There are a lot of angles on this story, so I invited one of the interns we have working in our Lubbock office named Payne (yes!) Sharpley to give me his take. Payne is a Sr. in Ag Econ at Texas Tech. Payne and I share more than a name, we share a passion for this stuff. I expect him to provide insight to the newsletter, I want to hear from guys who dont sit and stare at the forest that is the markets all day. As we move forward you can expect to hear more from him. As an academic, I asked him to provide a couple of paragraphs of what he notices:
Upon breaking the ice into the first February under the Trump administration and Chinese New Year, ICE Cotton #2 futures have absolutely steamrolled through resistance levels of 75 this week and pushed towards a near 6-month high with Mar ’17 futures closing 150 points higher at 76.44 on Wednesday. Front months following, May’17 and Jul’17 closed at 77.05(+1.45) and 77.57(+1.41), respectively, with Dec’17 closing only 56 points higher at 72.39. Last week’s Commitment of Traders report showed open interest increased by 32,534 with producers/merchants/processors increasing net shorts and longs by 10,791 and 2,538 contracts, respectively. This is likely due to hedgers locking in last week’s favorable prices in the mid 70 cents region, a narrowing basis, an alarmingly wide 5 cent spread between May’17 and Dec’17 futures, and increased estimates of US cotton production (mainly in TX). Additionally, traders and funds are beginning to roll their positions from March to May with anticipations of increasing volatility due to various fundamental reasons and world supply concerns for 2017.
Projections from the USDA have claimed that demand for cotton is going to outweigh supply by 1.24 MMT. China’s demand for 2017 is reportedly 5x higher than it was last year. Higher demand for US cotton has also been a key factor driving prices as we come into the second month of the new year with Pakistan, Turkey, and China being our top importers. Our cotton exports have also surpassed the 5-year average by 6%, and projections that we will be shipping the most cotton since 2013 are circumventing and beginning to prove true. So, if you remember what cotton prices were 4-5 years ago then I expect we will soon again be walking in ‘High Cotton’. Furthermore, India, the biggest producer of cotton in the world, is currently in an interesting position in regards to their agriculture production and trade considering the growing concerns about global cotton supply. Stating that, I have anticipated on rising prices ever since the Indian government shunned Monsanto last year whom which commandeered 90% of the country’s agricultural biotechnology (pesticides, GE seeds, GM plants). Believe it or not, but India’s Economic Times claimed that government officials and economists are preparing to undergo a reformation policy for their commodity markets because they “require a better infrastructure in order to compete with the ‘normal’ global cotton trade” due to poor quality. Expectedly, the country has planted 10% less cotton than the 2015-16 year due to white flies which come about from growing all organic wherein the plants do not get sprayed or planted with the necessary pesticides and/or seeds and are more susceptible to damage.
Thank you very much, Payne. Those are well thought out points, that touch on a lot of what I fear, specifically India and China. I have been hearing a lot of talk about currency problems in each country, combined with weak production last year and in the case of India maybe smaller production next year. This all matters. My argument would be that it is being priced in. I think the action in the July-Dec futures spread points toward capitulation.
The market traded into its price gap today on Dec 17 futures, which filled some orders we had sitting out there near 73.60. Time will tell whether or not this was a good play, but I think its the necessary one. I point back to corn from last year, when the market gave us this kind of price action only to have the funds take it away within weeks. While I think this rally is more justified than corn from a year ago, I think a correction is much over due. I lean on the long fund position as the reason to hedge. Buy puts or sell futures/spreads. How aggressive you want to be is up to you but I would look to trade this more aggressively from the short side at these levels. If Dec 17 gets through 75 then we maybe have a new ball game, but I think between now and the end of the second quarter, we will see lower prices- especially in Dec 17.
If you bear spread today, you would be profitable so far. I would look at July puts if you want to sell but want to take a conservative approach. Be ready to be wrong, do not get emotional and stick to your plan.
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