The Turnrow October 2014
_______________________________________________________________________
Your Cotton, Your Choice.
The Turnrow
by Jeff Thompson, AQCA Manager October 1, 2014
Welcome to this month’s edition of the AQCA newsletter “The Turnrow”. During the growing season we devote most of these issues to cotton production. However, with harvesting in full swing this month’s issue will focus on the cotton market and factors which will influence its direction in the months ahead. In addition, we will discuss some operational items to expedite your cotton payments and prevent any unnecessary delays.
Southeast Crop Conditions
Those who have been receiving our biweekly crop condition reports electronically have heard us talk all summer about the variability in this crop. Yields are expected to be all over the board with rainfall as spotty as it has been all season. After seeing this cotton defoliated and fully open, I for one feel the crop is better than once thought. Give credit to these newer varieties which certainly appear to be more stress tolerant and indeterminate than those of the past. Our previous varieties would not have come close to matching the yield potential of our current ones under the dry late summer conditions we encountered this year. Early harvest reports have dry land yields averaging around 750 pounds per acre. If the later cotton outperforms this, which it should, I feel real good about our overall yield prospects. As for fiber quality, we haven’t had enough classed yet to get a good handle on this. At present, I would estimate that 15 percent of the cotton acreage in this region has been harvested with Central Alabama and Southwest Georgia the furthest along.
West Texas Crop Conditions
The rain has finally showed up in West Texas & much of Oklahoma. Lakes are up and it’s adding much-needed moisture to the soil profile. Of course, most of this rain is too late for this year’s cotton crop, but we’ll never turn it away. Plus, the recent talk of El Nino moving in and us having “above average” rainfall this winter is exciting. The recent rainfall has, however, generated a lot of regrowth in the top of the plant, and it’s not helping the grades any. Most of this cotton [early cotton] was already done, though. Later cotton, as in late June cotton, could still be benefiting from the rain; however, as I’ve said all summer, we’ll still need more warm days and a late freeze for the late cotton to make. We’re optimistic about what we have, but it’s safe to say the Texas crop isn’t getting any bigger.
Cotton Contamination
Preventing cotton contamination becomes a hot topic every fall though it’s something we should be conscious of all year. Whether you are a producer, ginner, or warehouseman it’s important to understand the value of contamination free cotton. As you will glean from the market report, we must take every measure to ensure that U.S. cotton maintains its excellent reputation as one of
the cleanest growths of cotton As a producer there are a few steps one can take that will help prevent fiber contamination. Inspect fields for foreign materials that could be picked up by harvesting equipment and remove them such as; plastics (poly irrigation ditch liners, mulches, and pipe), roadside debris (shopping bags, clothing or other fabrics), and grease or oily residues. Inspect harvesting equipment daily to ensure that the equipment is not an inadvertent source of foreign material. Do not build modules where potential contaminants could be a problem. Finally, do not build or drop modules in standing or shredded stalks.
Market Report
Such a precipitous fall in the price of cotton, a high of 84.53 in May to the lower 60’s (a five year low), has created a great deal of anxiety and consternation within the industry. Uncertainty in any market is feared for it breeds bearishness and volatility. In this report, I would like to share our thoughts on factors certain to influence market direction over the upcoming months. Whether you are marketing through AQCA using the pool, selling at harvest on recaps, or have a forward price contract you will be aware of what must be considered when making future pricing decisions. I will be borrowing from comments made by John Mitchell in his recent presentation to the AQCA Board of Directors, as well as from our daily conversations. In late spring when cotton was trading above 80 cents, less than half of the U.S. crop had been planted, West Texas remained in the throes of a historical drought, and the total U.S production for 2014 appeared to be only slightly larger than last year - certainly not to increase ending stocks significantly. Also, bullish was the fact world stocks outside of China would reach their lowest level in 25 years. Large weekly export sales coupled with an unusually strong basis reflected a very supportive supply and demand situation. With mills having bought cotton in the 90’s, there was no reason to think this wouldn’t continue at current price levels. A market break seemed very unlikely, least of which we felt there would be time to get a better grasp on Autauga’s crop size before aggressively pricing this year’s crop. Similar thoughts across the cotton belt were probably the reason so little U.S. cotton was priced at these higher levels. The first break in the market came before Memorial Day weekend when West Texas began to get rainfall increasing the prospects of a larger U.S. crop. A slight sell-off was understandable, but the steepness of the decline was unforeseen in light of such favorable Supply & Demand numbers. Such a drastic move provided little opportunity for cover as “specs” (non-commercial traders including speculators and fund managers) rushed
to sell the market. Attempting to price cotton in this setting would have been akin to trying to catch a falling knife. Over the next several weeks the market became greatly oversold as fund managers continued their short activity. After reaching a peak net position of 70,000 contracts long, the specs sold the equivalent of 8 million bales of cotton in 16 weeks from May 6 through August 19. We love specs when they run the market up but despise them when they run it down. Fortunately, they own no cotton, so to capture profits their positions must be liquidated at some point in time. This reversal could lend some market support. Currently, the market has found a fairly solid support level at 62 cents while trading tightly around this price for several weeks now. What lies ahead for this market as we begin harvesting? Despite the bearish news from China, where it was recently announced a change in policy could limit their cotton imports to the WTO minimum of 4 million bales, the market held fast in its current trading range. However, any upside market momentum will depend heavily on China reversing this policy and allowing additional imports to come into the country. We feel strongly the latter is likely to occur at some time in the marketing year due to a shortage of high quality cotton much needed by their domestic mills. In addition, there are some macro-economic factors that could further deflate this market such as the health of the overall world economy in light of the civil unrest in the Middle East and the continued threat of the Ebola virus to human health. Not to be overlooked, there are some positive influences present that could support higher prices over time. At current levels, cotton is more competitive with man-made fibers. As indicated by USDA, the U.S. crop appears to be getting smaller reducing its production estimate by one million bales in their September report to 16 million bales of upland cotton. Some believe this may be further reduced in the October report. World ending stocks, outside of China, remain very tight indeed - especially supplies of high quality machine harvested fiber for which we are a reliable supplier. For this reason, and our price competiveness with man-made fibers, export sales are expected to remain strong. The U.S. has already sold or delivered 57 percent of the USDA export estimate with 10 months of the marketing year still remaining. Finally, though all commodities have sold off, one would expect a bidding war in the spring as these various commodity markets vie for planted acres. Apart from these positive indicators, keep in mind any retracement back to the 70’s will be met with pressure from a large supply of unhedged cotton that’s currently out there. We must realize this year’s cotton market is different from those of the recent past. The
previous two years saw hefty prices in the fall, which simplified marketing decisions. Historically, prices are lowest in the fall as a result of harvest pressure. Simply put, navigating this market is going to require the patience of Job when it comes to pricing cotton over the next several months; so it goes with our pool marketing strategy. We will go Samples. be carefully analyzing not only the market but also the quality of our inventory seeking value-adding pricing opportunities wherever they can be found in the weeks and months ahead. Our reliability as one 1795C a supplier of high quality fiber gives us access to ne WarmaRed C 2X wide range of merchandisers enhancing these prospects. Also, we now have available to us a marketing tool we haven’t had since 2009. Last week, the adjusted world price (AWP) fell to the point of triggering a Loan Deficiency Payment (LDP), or POP as it is more commonly referred. Our pool inventory will be placed into loan when received, therein positioned to capture these benefits when redeemed. The LDP payment amount is recalculated every Thursday night based on the running average of the previous five trading sessions. We will monitor this weekly in an effort to maximize these monies for the pool and contract cotton. As previously mentioned, the down side potential of this market is greater than the up side, at least short term. For this reason, we felt it prudent to put a floor underneath a portion of our pool inventory as insurance against a significant market decline. We have recently ntone 2995C implemented an option strategy, which will do just that but not exclude us from any market advances. The flexibility offered by options coupled with their protection is cheap insurance as we seek to manage your risk in such a volatile market.
John Mitchell 119 East Main Street Prattville, Alabama 36067 Phone: (334) 380-4738
[email protected]
AQCA News 2014 Pool Payroll Parameters
The Board of Directors recently approved the 2014 initial advance that will be paid to members as cotton is delivered to us. Eligible cotton will be paid government loan [with full premiums] plus a 3-cent advance. Since currently a Loan Deficiency Payments (LDP) is available, ineligible cotton will be paid loan rate with full premiums minus 5 cents. Subsequent progress payments will be made as marketing activity progresses.
2014 Forward Contracts
As in the past, the first cotton delivered will be applied to any forward contracts unless given special instructions. After the contracts are filled, all remaining bales will be assigned as instructed either to the pool or placed on recaps. If an LDP is available, AQCA will capture it for you on these bales and issue an additional payment to you for the accumulated gains once your contract is filled.
2014 Recap Sales
If you have opted to sell some or all of your production through AQCA by way of recaps please contact our office to discuss potential price targets and the process that will be followed to solicit bids.
Jeff Thompson 119 East Main Street Prattville, Alabama 36067 Phone: (334) 365-3369 [email protected] AQCA.COM
David Mullins 902 E Johnston Rotan, Texas 79546 Phone: (806) 549-4137 [email protected] AQCA.COM
MEMORIAM
It is with great sorrow we acknowledge the loss of one of Autauga Quality Cotton Association’s founding fathers. Mr. James Powell passed away Friday, August 22, 2014 at the age of 86. A long time cotton and dairy farmer in Prattville, Alabama, he grew his first cotton crop at the age of 11. Upon the passing of his father, Mr. Powell had to assume the unenviable role of caring for his family at an early age. He did so with diligence and responsibility while his mother instilled in him the need for higher education. Upon graduating from high school, he enrolled in the Alabama Polytechnic Institute, which is now Auburn University, completing a four-year degree in agriculture in only three years. As a devoted cotton farmer, Mr. Powell, along with Mr. Kirkpatrick and others, saw the need for a cotton marketing association and was instrumental in its formation in 1967. His love of numbers and excellent handwriting landed him the job of secretary – treasurer of AQCA. A position he maintained until his retirement from cotton production in 1996. He personally signed every check issued to members for over 29 years. Though a soft-spoken man, he was very respected and trusted within the community – being called on to serve in numerous leadership roles both locally and statewide. More important to Mr. Powell than any awards or accolades was his love of family and God. He was a true servant of the Lord teaching a Sunday School Class at the First Methodist Church for decades even up until the week before his passing. He touched the spiritual lives of so many individuals. A fact I found interesting was told at his funeral service when the preacher revealed Mr. Powell’s habit for shredding his Sunday school lesson notes each week so as to not deliver the same lesson twice. After all those years, he wanted his message to be genuine and from the heart just like the man he was. On a personal note, Mr. Powell took this young green county agent under his wing some 34 years ago. Between him and Mr. Kirk, this old peanut boy was schooled in cotton for which I’m very grateful. The time spent scouting his cotton together and going over scouting reports in his small office off the car port is something I will always remember and treasure. I thank him for the confidence he instilled in me and the time spent. We at AQCA extend our deepest sympathies to his wife, Madeira and the entire Powell family. He will be missed by many.
ATTENTION: AQCA and Choice Cotton Company have relocated their offices to 119 East Main Street Prattville, Alabama 36067. Please note our new mailing address and send all future documents to this location.
Your Cotton, Your Choice.
The Turnrow
by Jeff Thompson, AQCA Manager October 1, 2014
Welcome to this month’s edition of the AQCA newsletter “The Turnrow”. During the growing season we devote most of these issues to cotton production. However, with harvesting in full swing this month’s issue will focus on the cotton market and factors which will influence its direction in the months ahead. In addition, we will discuss some operational items to expedite your cotton payments and prevent any unnecessary delays.
Southeast Crop Conditions
Those who have been receiving our biweekly crop condition reports electronically have heard us talk all summer about the variability in this crop. Yields are expected to be all over the board with rainfall as spotty as it has been all season. After seeing this cotton defoliated and fully open, I for one feel the crop is better than once thought. Give credit to these newer varieties which certainly appear to be more stress tolerant and indeterminate than those of the past. Our previous varieties would not have come close to matching the yield potential of our current ones under the dry late summer conditions we encountered this year. Early harvest reports have dry land yields averaging around 750 pounds per acre. If the later cotton outperforms this, which it should, I feel real good about our overall yield prospects. As for fiber quality, we haven’t had enough classed yet to get a good handle on this. At present, I would estimate that 15 percent of the cotton acreage in this region has been harvested with Central Alabama and Southwest Georgia the furthest along.
West Texas Crop Conditions
The rain has finally showed up in West Texas & much of Oklahoma. Lakes are up and it’s adding much-needed moisture to the soil profile. Of course, most of this rain is too late for this year’s cotton crop, but we’ll never turn it away. Plus, the recent talk of El Nino moving in and us having “above average” rainfall this winter is exciting. The recent rainfall has, however, generated a lot of regrowth in the top of the plant, and it’s not helping the grades any. Most of this cotton [early cotton] was already done, though. Later cotton, as in late June cotton, could still be benefiting from the rain; however, as I’ve said all summer, we’ll still need more warm days and a late freeze for the late cotton to make. We’re optimistic about what we have, but it’s safe to say the Texas crop isn’t getting any bigger.
Cotton Contamination
Preventing cotton contamination becomes a hot topic every fall though it’s something we should be conscious of all year. Whether you are a producer, ginner, or warehouseman it’s important to understand the value of contamination free cotton. As you will glean from the market report, we must take every measure to ensure that U.S. cotton maintains its excellent reputation as one of
the cleanest growths of cotton As a producer there are a few steps one can take that will help prevent fiber contamination. Inspect fields for foreign materials that could be picked up by harvesting equipment and remove them such as; plastics (poly irrigation ditch liners, mulches, and pipe), roadside debris (shopping bags, clothing or other fabrics), and grease or oily residues. Inspect harvesting equipment daily to ensure that the equipment is not an inadvertent source of foreign material. Do not build modules where potential contaminants could be a problem. Finally, do not build or drop modules in standing or shredded stalks.
Market Report
Such a precipitous fall in the price of cotton, a high of 84.53 in May to the lower 60’s (a five year low), has created a great deal of anxiety and consternation within the industry. Uncertainty in any market is feared for it breeds bearishness and volatility. In this report, I would like to share our thoughts on factors certain to influence market direction over the upcoming months. Whether you are marketing through AQCA using the pool, selling at harvest on recaps, or have a forward price contract you will be aware of what must be considered when making future pricing decisions. I will be borrowing from comments made by John Mitchell in his recent presentation to the AQCA Board of Directors, as well as from our daily conversations. In late spring when cotton was trading above 80 cents, less than half of the U.S. crop had been planted, West Texas remained in the throes of a historical drought, and the total U.S production for 2014 appeared to be only slightly larger than last year - certainly not to increase ending stocks significantly. Also, bullish was the fact world stocks outside of China would reach their lowest level in 25 years. Large weekly export sales coupled with an unusually strong basis reflected a very supportive supply and demand situation. With mills having bought cotton in the 90’s, there was no reason to think this wouldn’t continue at current price levels. A market break seemed very unlikely, least of which we felt there would be time to get a better grasp on Autauga’s crop size before aggressively pricing this year’s crop. Similar thoughts across the cotton belt were probably the reason so little U.S. cotton was priced at these higher levels. The first break in the market came before Memorial Day weekend when West Texas began to get rainfall increasing the prospects of a larger U.S. crop. A slight sell-off was understandable, but the steepness of the decline was unforeseen in light of such favorable Supply & Demand numbers. Such a drastic move provided little opportunity for cover as “specs” (non-commercial traders including speculators and fund managers) rushed
to sell the market. Attempting to price cotton in this setting would have been akin to trying to catch a falling knife. Over the next several weeks the market became greatly oversold as fund managers continued their short activity. After reaching a peak net position of 70,000 contracts long, the specs sold the equivalent of 8 million bales of cotton in 16 weeks from May 6 through August 19. We love specs when they run the market up but despise them when they run it down. Fortunately, they own no cotton, so to capture profits their positions must be liquidated at some point in time. This reversal could lend some market support. Currently, the market has found a fairly solid support level at 62 cents while trading tightly around this price for several weeks now. What lies ahead for this market as we begin harvesting? Despite the bearish news from China, where it was recently announced a change in policy could limit their cotton imports to the WTO minimum of 4 million bales, the market held fast in its current trading range. However, any upside market momentum will depend heavily on China reversing this policy and allowing additional imports to come into the country. We feel strongly the latter is likely to occur at some time in the marketing year due to a shortage of high quality cotton much needed by their domestic mills. In addition, there are some macro-economic factors that could further deflate this market such as the health of the overall world economy in light of the civil unrest in the Middle East and the continued threat of the Ebola virus to human health. Not to be overlooked, there are some positive influences present that could support higher prices over time. At current levels, cotton is more competitive with man-made fibers. As indicated by USDA, the U.S. crop appears to be getting smaller reducing its production estimate by one million bales in their September report to 16 million bales of upland cotton. Some believe this may be further reduced in the October report. World ending stocks, outside of China, remain very tight indeed - especially supplies of high quality machine harvested fiber for which we are a reliable supplier. For this reason, and our price competiveness with man-made fibers, export sales are expected to remain strong. The U.S. has already sold or delivered 57 percent of the USDA export estimate with 10 months of the marketing year still remaining. Finally, though all commodities have sold off, one would expect a bidding war in the spring as these various commodity markets vie for planted acres. Apart from these positive indicators, keep in mind any retracement back to the 70’s will be met with pressure from a large supply of unhedged cotton that’s currently out there. We must realize this year’s cotton market is different from those of the recent past. The
previous two years saw hefty prices in the fall, which simplified marketing decisions. Historically, prices are lowest in the fall as a result of harvest pressure. Simply put, navigating this market is going to require the patience of Job when it comes to pricing cotton over the next several months; so it goes with our pool marketing strategy. We will go Samples. be carefully analyzing not only the market but also the quality of our inventory seeking value-adding pricing opportunities wherever they can be found in the weeks and months ahead. Our reliability as one 1795C a supplier of high quality fiber gives us access to ne WarmaRed C 2X wide range of merchandisers enhancing these prospects. Also, we now have available to us a marketing tool we haven’t had since 2009. Last week, the adjusted world price (AWP) fell to the point of triggering a Loan Deficiency Payment (LDP), or POP as it is more commonly referred. Our pool inventory will be placed into loan when received, therein positioned to capture these benefits when redeemed. The LDP payment amount is recalculated every Thursday night based on the running average of the previous five trading sessions. We will monitor this weekly in an effort to maximize these monies for the pool and contract cotton. As previously mentioned, the down side potential of this market is greater than the up side, at least short term. For this reason, we felt it prudent to put a floor underneath a portion of our pool inventory as insurance against a significant market decline. We have recently ntone 2995C implemented an option strategy, which will do just that but not exclude us from any market advances. The flexibility offered by options coupled with their protection is cheap insurance as we seek to manage your risk in such a volatile market.
John Mitchell 119 East Main Street Prattville, Alabama 36067 Phone: (334) 380-4738
[email protected]
AQCA News 2014 Pool Payroll Parameters
The Board of Directors recently approved the 2014 initial advance that will be paid to members as cotton is delivered to us. Eligible cotton will be paid government loan [with full premiums] plus a 3-cent advance. Since currently a Loan Deficiency Payments (LDP) is available, ineligible cotton will be paid loan rate with full premiums minus 5 cents. Subsequent progress payments will be made as marketing activity progresses.
2014 Forward Contracts
As in the past, the first cotton delivered will be applied to any forward contracts unless given special instructions. After the contracts are filled, all remaining bales will be assigned as instructed either to the pool or placed on recaps. If an LDP is available, AQCA will capture it for you on these bales and issue an additional payment to you for the accumulated gains once your contract is filled.
2014 Recap Sales
If you have opted to sell some or all of your production through AQCA by way of recaps please contact our office to discuss potential price targets and the process that will be followed to solicit bids.
Jeff Thompson 119 East Main Street Prattville, Alabama 36067 Phone: (334) 365-3369 [email protected] AQCA.COM
David Mullins 902 E Johnston Rotan, Texas 79546 Phone: (806) 549-4137 [email protected] AQCA.COM
MEMORIAM
It is with great sorrow we acknowledge the loss of one of Autauga Quality Cotton Association’s founding fathers. Mr. James Powell passed away Friday, August 22, 2014 at the age of 86. A long time cotton and dairy farmer in Prattville, Alabama, he grew his first cotton crop at the age of 11. Upon the passing of his father, Mr. Powell had to assume the unenviable role of caring for his family at an early age. He did so with diligence and responsibility while his mother instilled in him the need for higher education. Upon graduating from high school, he enrolled in the Alabama Polytechnic Institute, which is now Auburn University, completing a four-year degree in agriculture in only three years. As a devoted cotton farmer, Mr. Powell, along with Mr. Kirkpatrick and others, saw the need for a cotton marketing association and was instrumental in its formation in 1967. His love of numbers and excellent handwriting landed him the job of secretary – treasurer of AQCA. A position he maintained until his retirement from cotton production in 1996. He personally signed every check issued to members for over 29 years. Though a soft-spoken man, he was very respected and trusted within the community – being called on to serve in numerous leadership roles both locally and statewide. More important to Mr. Powell than any awards or accolades was his love of family and God. He was a true servant of the Lord teaching a Sunday School Class at the First Methodist Church for decades even up until the week before his passing. He touched the spiritual lives of so many individuals. A fact I found interesting was told at his funeral service when the preacher revealed Mr. Powell’s habit for shredding his Sunday school lesson notes each week so as to not deliver the same lesson twice. After all those years, he wanted his message to be genuine and from the heart just like the man he was. On a personal note, Mr. Powell took this young green county agent under his wing some 34 years ago. Between him and Mr. Kirk, this old peanut boy was schooled in cotton for which I’m very grateful. The time spent scouting his cotton together and going over scouting reports in his small office off the car port is something I will always remember and treasure. I thank him for the confidence he instilled in me and the time spent. We at AQCA extend our deepest sympathies to his wife, Madeira and the entire Powell family. He will be missed by many.
ATTENTION: AQCA and Choice Cotton Company have relocated their offices to 119 East Main Street Prattville, Alabama 36067. Please note our new mailing address and send all future documents to this location.
