Market Outlook. David Reinbott.

Transcription

1 Market Outlook David Reinbott Agriculture Business Specialist P.O. Box 187 Benton, MO (573)

2 Cotton Fundamentals and Current Outlook John Robinson Professor and Extension Economist-Cotton Marketing Department of Agricultural Economics Texas A&M AgriLife Extension Service Texas A&M University College Station, Texas

3 A Tale of Two Outlooks I. USDA has projected bearishly increasing U.S. cotton ending stocks for 12 months II. Foreign mills responded to low price outlook by record on-call purchases/export sales III. Hedge funds interpreted this as bullish new demand and bought the market higher IV. The influence of mill fixations and hedge fund buying may only last through June V. Long term fundamental picture is still for bearish increase in U.S. ending stocks

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6 USDA Projections 2016/17 Est. 2017/18 Proj. Area Million Acres Planted Harvested Pounds Yield/Harvested Acre Million 480 Pound Bales Beginning Stocks Production Imports Supply, Total Domestic Use Exports, Total Use, Total Unaccounted Ending Stocks January 12, 2018 USDA Supply/Demand Report

7 U.S. Stocks/Use vs. Average Monthly Nearby Futures Settlement Price August 1995 January 2018 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Cents/Lb. and Percentage Stocks/Use Nearby Futures Marketing Year

8 Demand Influences U.S. Economic Indicators U.S. Exports Speculative Money Mill Fixations Emerging Foreign Issues

9 Cotton Supply Chain Production Shipping and Handling FARMS GINS WAREHOUSES MERCHANTS Manufacturing Trucking, Rail, and maybe Ocean Shipping Apparel Factory Textile Factory Yarn Mill Ocean Shipping, Rail, and Trucking Retail Clothing and Home Furnishings

10 Percent Change Cotton Demand: Influence of Slow Global Economics Growth Real GDP Growth, World Advanced Economies Emerging Market and Developing Economies World Economic Outlook, October

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13 8/7/2014 8/21/2014 9/11/2014 9/25/ /9/ /23/ /6/ /20/ /27/ /11/2014 1/8/2015 1/29/2015 2/12/2015 2/19/2015 3/5/2015 3/19/2015 4/2/2015 4/9/2015 4/23/2015 5/7/2015 5/21/2015 5/28/2015 6/11/2015 6/25/2015 7/16/2015 7/30/2015 8/13/2015 8/27/2015 9/17/ /1/ /15/ /29/ /12/ /3/ /17/2015 1/14/2016 1/21/2016 2/4/2016 2/25/2016 3/10/2016 3/24/2016 3/31/2016 4/14/2016 4/28/2016 5/12/2016 5/26/2016 6/2/2016 6/16/2016 6/30/2016 7/7/2016 7/21/2016 8/4/2016 8/18/2016 9/1/2016 9/8/2016 9/22/ /6/ /20/ /3/ /17/ /23/ /8/ /22/ /29/2016 1/5/2017 1/26/2017 2/9/2017 3/2/2017 3/16/2017 3/30/2017 4/13/2017 4/20/2017 5/4/2017 5/18/2017 6/8/2017 6/22/2017 7/13/2017 7/27/2017 8/10/2017 8/24/2017 9/14/2017 9/28/ /12/ /26/ /9/ /30/ /14/2017 1/11/2018 1/18/ Running Bales Cents/Lb Cotton Demand: Short Run Price Influences U.S. Upland Cotton Net Export Sales and Nearby Futures Weekly Net Export Sales Nearby Futures August 7, 2014 January 25, 2017

14 Sidebar: How Mills Buy Cotton Hand-to-mouth spot purchases for near term delivery On-Call purchases with extended delivery date

15 8/7/2014 8/21/2014 9/11/2014 9/25/ /9/ /23/ /6/ /20/ /27/ /11/2014 1/8/2015 1/29/2015 2/12/2015 2/19/2015 3/5/2015 3/19/2015 4/2/2015 4/9/2015 4/23/2015 5/7/2015 5/21/2015 5/28/2015 6/11/2015 6/25/2015 7/16/2015 7/30/2015 8/13/2015 8/27/2015 9/17/ /1/ /15/ /29/ /12/ /3/ /17/2015 1/14/2016 1/21/2016 2/4/2016 2/25/2016 3/10/2016 3/24/2016 3/31/2016 4/14/2016 4/28/2016 5/12/2016 5/26/2016 6/2/2016 6/16/2016 6/30/2016 7/7/2016 7/21/2016 8/4/2016 8/18/2016 9/1/2016 9/8/2016 9/22/ /6/ /20/ /3/ /17/ /23/ /8/ /22/ /29/2016 1/5/2017 1/26/2017 2/9/2017 3/2/2017 3/16/2017 3/30/2017 4/13/2017 4/20/2017 5/4/2017 5/18/2017 6/8/2017 6/22/2017 7/13/2017 7/27/2017 8/10/2017 8/24/2017 9/14/2017 9/28/ /12/ /26/ /9/ /30/ /14/2017 1/11/2018 1/18/ Running Bales Cents/Lb Cotton Demand: Short Run Price Influences U.S. Upland Cotton Net Export Sales and Nearby Futures Weekly Net Export Sales Nearby Futures August 7, 2014 January 25, 2017

16 Cotton Export Total Commitments as a Percent of U.S. Cotton Exports, by Week Percent / / / / / /18 Source: USDA/OCE/FAS

17 Cotton Demand: Record Mill Fixations Implies 10 futures bought for every sold

18 1/3/06 2/16/06 4/1/06 5/15/06 6/28/06 8/11/06 9/24/06 11/7/06 12/21/06 2/3/07 3/19/07 5/2/07 6/15/07 7/29/07 9/11/07 10/25/07 12/8/07 1/21/08 3/5/08 4/18/08 6/1/08 7/15/08 8/28/08 10/11/08 11/24/08 1/7/09 2/20/09 4/5/09 5/19/09 7/2/09 8/15/09 9/28/09 11/11/09 12/25/09 2/7/10 3/23/10 5/6/10 6/19/10 8/2/10 9/15/10 10/29/10 12/12/10 1/25/11 3/10/11 4/23/11 6/6/11 7/20/11 9/2/11 10/16/11 11/29/11 1/12/12 2/25/12 4/9/12 5/23/12 7/6/12 8/19/12 10/2/12 11/15/12 12/29/12 2/11/13 3/27/13 5/10/13 6/23/13 8/6/13 9/19/13 11/2/13 12/16/13 1/29/14 3/14/14 4/27/14 6/10/14 7/24/14 9/6/14 10/20/14 12/3/14 1/16/15 3/1/15 4/14/15 5/28/15 7/11/15 8/24/15 10/7/15 11/20/15 1/3/16 2/16/16 3/31/16 5/14/16 6/27/16 8/10/16 9/23/16 11/6/16 12/20/16 2/2/17 3/18/17 5/1/17 6/14/17 7/28/17 9/10/17 10/24/17 12/7/17 1/20/18 140, , ,000 80,000 60,000 40,000 20, ,000-40,000-60,000 Hedge Fund Buying Has Supported the Price Rally January 3, 2006 Through January 30, 2018 No. of Contracts Cents/Lb Index Funds Hedge Funds Nearby Futures Source: Commitment of Traders Supplemental Report (Futures and Options)

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20 Two Emerging Issues Affecting U.S. Exports: 3rd Indian Crop 1st Chinese Export Demand 2nd

21 Indian Production 2017 Production: million bales 2017 Consumption: million bales Production issues this year include early excess rains/floods, bollworm outbreaks, and harvest time rains.

22 Chinese Cotton Belt 2017 Production: million bales 2017 Consumption: million bales 2017 Net Deficit: million bales Deficit more than covered by: 1) Modest Imports (projected 5.1 million bales) and 2) Chinese Reserve Sales of 14.8 million bales, leaving ca. 22 million inventory remaining in the Reserve. Note: Many expect China replace supplies in the reserve at some point, implying a lot more import demand.

23 Will the 2017/18 Balance Sheet Fundamentally Change???? 2016/17 Est. 2017/18 Proj. Area Million Acres Planted Harvested Pounds Yield/Harvested Acre Million 480 Pound Bales Beginning Stocks Production Imports Supply, Total Domestic Use Exports, Total Use, Total Unaccounted Ending Stocks Avg. Farm Price January 12, 2018 USDA Supply/Demand Report

24 2018 Supply Considerations Higher U.S. planted acres Chance of continued dryness at planting time from La Niña Potentially large supply

25 Million Acres (Ratio=5.1 on Jan. 12) Ratio of December Corn vs. Cotton Futures, Three Month Average First Quarter, vs. June Cotton Planted Acreage Report Ratio

26 Current Dryness

27 Cotton Balance Sheets 2016/17 Est. 2017/18 Proj. 2018/19 JR Est. Area Million Acres Planted Harvested Pounds Yield/Harvested Acre Million 480 Pound Bales Beginning Stocks Production Imports Supply, Total Domestic Use Exports, Total Use, Total Unaccounted Ending Stocks Avg. Farm Price January 12, 2018 USDA Supply/Demand Report

28 Taking Action Old crop and new crop prices are relatively high Although highly discounted cash bids are hard to swallow, but Consider early pricing or hedging of some new crop

29 Different Ways of Doing the Same Thing CORE POSITION COST SAVING MEASURES Cash Contract with Merchant Buy Call Also Sell Call Buy Put Hold Cash Open Also Sell Put Also Sell Call Sell Futures Buy Call Also Sell Call

30 Buy 70 Put for 2018 Crop Strike Price Buy 70 Put Premium 2.26 Net Short Futures Position February 5, 2018, Dec Net Cost for 50,000 Lb. Contract = $1,130

31 Buy 75 Put for 2018 Crop Strike Price Buy Dec. 18, 75 Put Net Short Futures Position Downside price move covered, upside open February 5, 2018, Dec. 18 Futures Cost for 50,000 Lb. Contract = $2,015

32 75:65 Put Spread Strike Price Buy 75 Put Premium Sell 65 Put Premium Net Cost Net Short Futures Position February 5, 2018, Dec Net Cost for 50,000 Lb. Contract = $1,505

33 9/1/17 9/6/17 9/8/17 9/12/17 9/14/17 9/18/17 9/20/17 9/22/17 9/26/17 9/28/17 10/2/17 10/4/17 10/6/17 10/10/17 10/12/17 10/16/17 10/18/17 10/20/17 10/24/17 10/26/17 10/30/17 11/1/17 11/3/17 11/7/17 11/9/17 11/13/17 11/15/17 11/17/17 11/21/17 11/24/17 11/28/17 11/30/17 12/4/17 12/6/17 12/8/17 12/12/17 12/14/17 12/18/17 12/20/17 12/22/17 12/27/17 12/29/17 1/3/18 1/5/18 1/9/18 1/11/18 1/16/18 1/18/18 1/22/18 1/24/18 1/26/18 1/30/18 2/1/18 December 2018 Futures Settlement Price vs. December 75 Put Option Contracts and Put Spread Cents/Lb Cents/Lb Daily Settlement Price $.75 Put $0.75-$0.65 Put Spread Daily September 1, 2017 February 2, 2018

34 What About Just Selling Dec. 18 Futures Straight Futures Hedging Feb. 5, 2018 sell Dec Effective Floor Price = Futures less Expected Basis, i.e., you avoid option premiums Will receive effective floor price (subject to basis risk) regardless of how low or how high Dec 18 moves Fully exposed to margin risk (cash flow and stomach lining)

35 March 2018 Cotton Futures

36 December 2018 Cotton Futures

37 Weekly December Cotton Futures

38 Revenue University of Missouri Extension Southeast Missouri Non-Irrigation Crop Budgets 2018 Corn GMO Soybean Roundup Ready 2 Xtend Soybean Liberty Link Cotton Wheat D. C. Soybean L.L. Estimated Yield (Bu/Acre) A Estimated Price ($/Bushel) B $3.70 $9.80 $9.80 $0.730 $4.67 $9.80 Estimated Gross Revenue ($/Acre) $ $ $ $ $ $ Total Variable Cost $ $ $ $ $ $ Total Costs (Excluding Land) $ $ $ $ $ $ Total Cost (Including Land or Rent) $ $ $ $ $ $ Estimated Returns Returns Above Variable Costs $ $ $ $ $90.93 $ Returns Above Mach & Buildings $ $ $ $66.90 $47.93 $ Returns Above Total Costs ($53.88) ($2.74) $11.68 ($95.10) ($33.07) $56.33 Breakeven Price $4.03 $9.86 $9.56 $0.84 $5.14 $8.46 Breakeven Yield ,

39 Revenue Corn GMO Soybean Roundup Ready 2 Xtend Soybean Liberty Link Cotton Rice Convent. Wheat D. C. Soybean L.L. Estimated Yield (Bu/Acre) A Estimated Price ($/Bushel) B $3.70 $9.80 $9.80 $0.730 $5.10 $4.67 $9.80 Estimated Gross Revenue ($/Acre) $ $ $ $ $ $ $ Total Variable Cost $ $ $ $ $ $ $ Total Costs (Excluding Land) $ $ $ $ $ $ $ Total Cost (Including Land or Rent) $ $ $ $ $ $ $ Estimated Returns University of Missouri Extension Southeast Missouri Irrigation Crop Budgets 2018 Returns Above Variable Costs $ $ $ $ $ $ $ Returns Above Mach & Buildings $ $ $ $ $ $71.28 $84.10 Returns Above Total Costs ($57.95) $32.98 $51.52 $60.74 $ ($9.72) $3.10 Breakeven Price $3.96 $9.29 $9.01 $0.68 $4.51 $4.80 $9.74 Breakeven Yield ,

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41 CONTACT INFO Phone: Cotton Spin Column, Southwest Farm Press The Cotton Marketing Planner Newsletter Facebook:

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