Squeeze situations in financial markets have been in the news this year. In early 2021, the stock of the company GameStop was subject to extreme price volatility as a large number of short sellers were forced to buy back their positions while other traders were buying the stock aggressively. Squeeze plays exist in commodity futures markets, too. A common example of this can happen with short speculators in a rising futures market. Assuming those speculators can’t deliver the physical commodity against their short futures position, they are left having to buy their way out of their short futures position, which contributes to upside price volatility.
A different version of this short squeeze situation is playing out in ICE cotton futures in the current marketing year. The set-up for this situation involves a number of things. First, there is a physical supply imbalance in the form of the very low level of physical “certified stocks” of cotton that are eligible for delivery against ICE cotton futures contracts, as shown in Figure 1. Daily certified stock levels are published daily by the ICE.
Second, there is a historically high level of “unfixed call sales” contracts, especially on the Mar’22, May’22, and Jul’22 cotton contracts. Unfixed call sales represent un-finalized basis contracts between merchants and mills which will eventually require buying of futures to fix the price. This situation is reflected by weekly data published by the U.S. Commodity Futures Trading Commission.
Third, there is also historically large, long speculative positioning in ICE futures, including both hedge funds and index funds. With the current expectations for rising inflation, speculators who are long cotton futures may hang on to, or even expand their long futures position in ICE cotton. This could lead to continued futures price volatility, especially during February, April, and June.
Peanuts are a predominant Southern crop, with Georgia, Alabama, Florida, and Texas – the top four states in 2021 planted acreage – accounting for over four-fifths of the area planted nationwide. Peanut acreage declined by 5% to 1.58 million planted acres in the US in 2021. This year’s peanut production is projected at 3.15 million tons, which would be a 2.2% increase above 2020. This forecast increase in production comes despite the decreased acreage planted and is driven by a projected 7.7% increase in yield over 2020, to 4,105 pounds per acre.
Figure 1: 2021 Planted Peanut Acreage; Data source: USDA-FSA
The strong peanut demand from the 2020/2021 marketing year is expected to continue and meet production this current marketing year. However, peanut stocks are expected to remain plentiful, above 1 million tons, a slight increase from last year. Prices for the 2021/2022 marketing year are expected to increase to $430/ton. The long-term outlook, as forecast by the Food and Agricultural Policy Research Institute (FAPRI), expects prices to remain in a similar range moving forward.
Figure 2: Past and Projected Peanut Prices by Marketing Year; Data sources: USDA-NASS and FAPRI-MU U.S. Agricultural Market Outlook (2021)
If you drive around the countryside in the Cotton Belt in October and November, you will encounter snow white cotton ready to be harvested. This is the busiest time of the year for cotton producers and when they receive the reward for a hard year’s work. For many producers, this year’s harvest combines good yields and good prices, which is rare for cotton producers.
The USDA Crop Progress report, released on November 8, 2021, indicated 98 percent of cotton bolls opened nationwide, with 55 percent of cotton acres harvested. Crop condition has remained steady this year, with greater than 60 percent of cotton rated in good-to-excellent condition since the end of July. The November 2021 USDA World Agricultural Supply and Demand Estimates (WASDE) report projected U.S. cotton production at 18.2 million bales this year, slightly over the U.S. cotton demand – 15.5 million bales of exports and 2.5 million bales of domestic mill use. The U.S. ending stocks-to-use ratio is forecast at 18.9 percent for the 2021/22 marketing year, slightly above last season, but below each of the previous three years. Globally, 2021 cotton production is projected at 121.8 million bales, which is 9.6 million bales greater than last year. World cotton mill use is projected slightly higher than production at 124.1 million bales, 3.2 million bales above last season, and the second largest on record.
Current supply and demand fundamentals support high cotton prices. However, it is hard for cotton supply and demand fundamentals to explain the recent price surge. Since the middle of September, cotton prices skyrocketed, with December Futures rising from the mid-90 cents per pound to a high of 121.67 cents per pound on November 2, 2021. If supply and demand fundamentals cannot explain the price increase, then what could be the cause of the recent price surge?
Historically, cotton prices tend to follow the stock market, with a rise in cotton prices when the stock market rises and a decline in cotton prices when the stock market drops. Cotton markets have been on an upward trajectory since April 2020, with a recovery of futures prices from the low 50 cents per pound to over 100 cents per pound starting in October 2021. In recent weeks, the stock market has been on a roller coaster ride (Figure 1). As money flows out of the stock market seeking the next opportunity for a short-term gain, other markets like cotton can experience an inflow of speculative money, pushing prices higher. This flow of money into cotton markets has pushed prices to levels that exceed those indicated by supply and demand fundamentals, creating a potential marketing opportunity for cotton producers. However, the flow of money in and out of cotton markets can also make prices unpredictable and volatile, thus making it difficult for producers to predict the direction of cotton prices. Speculative money could continue to push cotton prices higher; however, when speculative money leaves cotton markets, prices will fall sharply (possibly with a temporary correction below the price supported by global cotton supply and demand fundamentals). For now, producers may want to consider completing 2021 crop marketing at very robust price levels.
Figure 1. Cotton 2021 December Future Prices (Blue Area) and S&P 500 Index (Blue Line).
The current high prices have one certain result—more corn acres. To the extent that farmers in Brazil, Argentina, and everywhere else, see these high prices they are going to increase their production. –Daryll E. Ray and Harwood D. Schafer (2012)
A fundamental approach to a commodity price outlook involves plugging in expectations for various components of the supply and demand balance sheet as well as some influence of expected returns of competing crops. How the combination of these factors impact ending stocks provides expected price direction: tighter stocks, higher prices; increased stocks, lower prices. One of the greatest uncertainties related to forming an expected corn price in 2022 is the question of acreage.
Demand. U.S. corn use over the last several years has varied little (Table 1 and Figure 1). Domestic use since 2016 has averaged 12.244 billion bushels, in a range from -178 million to +111 million from that average. Exports have been the use category that has separated total use from low to high. Total use was the lowest of the last six years in 2019/20, coinciding with the lowest exports of the time frame. Total use was the highest of the last six years in 2020/21, the year we set export records for U.S. corn. The export forecast for U.S. corn in 2021/22 is down compared to the previous year as record production is forecast from our primary export competitors: Brazil, Argentina, Ukraine, and Russia.
Table 1. U.S. Corn Use
U.S. Corn (million bu.)
2016/17
2017/18
2018/19
2019/20
2020/21
2021/22 est.
Average
Domestic Use
12,354
12,355
12,223
12,185
12,066
12,280
12,244
Exports
2,293
2,438
2,065
1,778
2,753
2,500
2,305
Total Use
14,647
14,793
14,288
13,963
14,819
14,780
14,548
Source: USDA, WASDE, October 2021
Figure 1. U.S. Corn Use
Source: USDA, WASDE, October 2021
Supply. Since 1950, the average corn yield in the U.S. has increased at the rate of about 2 bushels per acre per year (Figure 2). The trend line yield estimate for the 2021 crop was 176.7 bushels per acre. The latest estimate from USDA for the 2021 corn crop is an average yield of 176.5 bushels per acre. Given ‘normal’ growing conditions in 2022, that trend line yield estimate is 178.7 bushels per acre.
Figure 2. U.S. Corn Average Yield and Trendline Projection
Source: USDA, WASDE, October 2021
Maximum combined planted acres of corn and soybeans in the U.S. the last five years is about 180 million acres. One early predictor of corn and soybean plantings is the relationship between soybean prices and corn prices prior to planting. Using the base prices for crop insurance set by the Risk Management Agency to calculate the price ratio (February average closing price of November soybean futures divided by December corn futures), shows a range in the soybean: corn price ratio since 2006 of 1.99 to 2.59. Years in which that ratio is relatively low, corn acres tend to increase relative to soybean acres. In years in which that price relationship is relatively high, the difference between corn and soybean plantings decreases (Figure 3). For example, in 2007, the soybean-to-corn price ratio in February was 1.99. Corn plantings that year exceeded soybeans by 29 million acres (93.5 million corn, 64.7 million soybeans). In February 2017 and 2018, the soybean to corn price ratio in February was 2.57. Plantings both those years were virtually the same for soybeans and corn (90.2 and 88.9 corn, 90.2 and 89.2 soybeans). Currently, the price ratio between November soybean futures and December corn futures is 2.25, down from 2.59 in 2021 and below the average ratio from 2006 to 2021 of 2.35.
Figure 3. Corn acres minus soybean acres, millions (2019 intended, all other actual)
But that price relationship may be affected in 2022 by soaring fertilizer prices. The price of anhydrous ammonia reported by the Agricultural Marketing Service is currently $1,135 per ton, urea is $810 per ton, and 28% liquid N is $475 per ton (USDA, AMS, 2021). Compared to the cost of nitrogen fertilizer in southeastern corn crop budgets for 2021, at 200 pounds of N per acre, the cost increases from about $80 per acre in 2021 to $180 per acre for 2022. With a 200 bushel yield, the additional cost of nitrogen alone adds 50 cents per bushel to the cost of growing corn. Soybeans, which have lower fertility requirements, would have a lower increase in the cost of production when compared to corn.
If nitrogen affordability is measured by the number of bushels of corn it takes to buy a ton of fertilizer, the current price increase is somewhat more moderate given higher corn prices (Figure 4). The average price of anhydrous ammonia since September is $884 per ton. At $5.00/bu corn, it takes 177 bushels of corn to purchase one ton of anhydrous. In 2021, that cost was 101 bushels per ton ($552/ton anhydrous and $5.45 per bushel corn), one of the lowest bushels per ton ratios of the last 25 years. The most expensive anhydrous measured in bushels of corn since 1997 was 230 bushels per ton in 2014 ($851 per ton anhydrous, $3.70 per bushel corn). The average cost in bushels per ton since 1997 is 153.
Figure 4. Anhydrous Ammonia Prices
Ending Stocks. Using an estimate of corn use and average yield, we can calculate the planted acres needed to match production to consumption. The likelihood of acres above or below this threshold guides our price outlook based on the number of acres that will tighten or build stocks (Figure 5). If we assume that total corn use in the 2022/23 marketing year is about the same as the higher levels of the last five years (14.8 billion bushels) and a trendline yield of 178.5 bushels per acre, corn plantings of 90 million acres would match production to use (assuming 92 percent of planted acres harvested for grain). U.S. farmers planted 93.3 million acres in 2021.
It seems likely that the soybean-to-corn price ratio and affordability measures of nitrogen fertilizer will influence producers’ planting decisions in 2022. Monitoring changes in these relationships over the winter may provide insight in to how this important piece of the fundamental outlook for corn shapes our price expectations and marketing decisions.
Figure 5. Planted area and yield needed to produce a 14.8 billion bushel corn crop
References:
Daryll E. Ray and Harwood D. Schaffer,” Production destruction leads to both short-term and long-term demand destruction”, Agricultural Policy Analysis Center, University of Tennessee, Knoxville, TN; August 3, 2012.
Cotton futures, like many commodities, are subject to speculative buying and selling. Participants in the futures market can buy or sell futures contracts with the anticipation of future prices rising or dropping. The most variable type of speculative buying is from so-called hedge funds, comprised mostly of managed private investment money. Hedge funds use various quantitative and other methods to position themselves for anticipated uptrends or downtrends in commodity markets. Notwithstanding the validity of their technical indicators or buying rules, hedge fund buying appears somewhat influential on prices, particularly ICE cotton in 2021.
This is depicted in Figure 1 as the upward spikes in the green area, representing the excess of long ICE cotton contract positions (buying positions) held over short positions (selling positions) held. These green peaks and valleys visually correspond to peaks and valleys in the pattern of nearby ICE cotton futures settlement prices as represented by the red line (Figure 1). Statistically speaking, simple annual cotton futures price models can be specified to account for the influence of things like USDA’s projected ending stocks-to-use ratio, the speculative net position of hedge funds (in contracts), and outlier years like 2010/11. The results of these types of models tend to project slightly less than a cent up or down, resulting from a 10,000 contract increase or decrease, respectively, in the hedge fund net long position. In 2021, from early June to early October, the hedge fund net long position has risen almost 60,000 contracts, which is associated with about six cents of the 24+ cent upward move in ICE cotton futures since June. (Note: other potentially influential variables in 2021 include tightening fundamentals and increased index fund buying are not included in the analysis here).
Whatever the quantitative influence of changing hedge fund positioning, it may be useful to take note of the short duration of fluctuations in hedge fund excess buying. Figure 1 shows many instances of peaks in hedge fund buying that appear to last only a few weeks, as do the associated price rallies. It seems impossible to predict the change in sentiments, animal spirits, model forecasts, technical indicators, and/or black swan events that will influence hedge fund managers’ positioning in ICE cotton. So, whatever the influence of hedge fund buying on the cotton market, it is frequently a short-lived phenomenon.
Figure 1. Weekly net position of hedge funds in ICE Cotton Futures and Options (green area) and daily nearby ICE Cotton Futures settlement price (red line). The left vertical axis represents the net position of hedge funds, and the right vertical axis represents the price for the ICE cotton futures settlement prices.
Source: Commitment of Traders Supplemental Report (Futures and Options)
