Category: Crop Marketing

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. 

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Robinson, John. “Speculative Influence on ICE Cotton Futures.” Southern Ag Today 1(45.1). November 1, 2021. Permalink

Soybean value is derived from two products: oil and meal. In general, a 60-pound bushel of soybeans produces 48 pounds of soybean meal and 11 pounds of soybean oil with 1 pound of processing waste. To estimate crush margin, the following calculations can be used: 

Soybean meal value ($/bu) = Soybean meal price ($/ton)/2,000 x 48 lb/bu^[1]

Soybean oil value ($/bu) = Soybean oil price (cents/lb)/100 x 11 lb/bu

Crush margin ($/bu) = (Soybean meal value + Soybean oil value) – Soybean price ($/bu)

The crush margin is an estimate of gross margin for a soybean processor and can be used as an indicator of profitability. Figure 1 depicts the monthly nearby soybean futures price and the monthly crush margin. Since January 2006, the average futures market crush margin has been $1.46/bu with a minimum of $0.90 and a maximum of $3.18. As of October 13, 2021, the crush margin was $2.08 indicating an above average gross margin or an incentive to crush (this may be partially diminished due to increased costs to operate soybean crush facilities due to COVID-19 and labor/logistical issues). 

But what is driving this incentive? Looking at the data shows that the percent of value derived from meal and oil changed in April 2021. For the first three months of 2021, soybean meal was 65% of the soybean value, the same as the January 2006 to October 2021 average. However, since April this ratio has moved in favor of oil with the October 2021 estimate of 54% of soybean value attributed to meal and 46% to oil (Figure 2). There are two primary reasons for increased soybean oil value. First, increased vegetable oil demand and lower stocks are causing the number of global days-on-hand (stocks divided by daily average consumption) to drop from 41.7 days in the 2020/21 marketing year to 38.5 days projected for the 2021/22 marketing year. The second factor is current and potential demand for biodiesel derived from soybean oil. Energy prices have risen dramatically this year, and the federal government has emphasized continued development of biodiesel as a renewable fuel.

So, what does this tell us about prices? Soybean meal futures prices have declined since the start of the year, dropping from $417.60/ton in January 2021 to $312.90/ton in October 2021. Conversely, soybean oil futures have increased from 44.62 cents/lb to 58.62 cents/lb. Over the same time, soybean futures have dropped from $13.70/bu to $11.88/bu. While strong demand for soybean oil has helped support soybean prices, it is likely that soybean meal will drive prices and gross returns to farmers moving forward.  As such, even if soybean oil prices continue to strengthen, the soybean meal market will likely need to establish a floor (or increase in value) for soybean prices to resume a strong upward trend.

Figure 1. Monthly Nearby Soybean Futures Contract Price and Crush margin, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

Figure 2. Meal and Oil Value per bushel of Soybeans, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

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^[1] There are two common approaches to estimating the quantity of soybean meal: (1) the one depicted above, 48 lbs of soybean meal at (44% protein) or (2) 44 lbs of soybean meal (48% protein), which is used by CME group.

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Smith, Aaron. “What’s Driving Soybean Value: Meal or Oil?” Southern Ag Today 1(44.1). October 25, 2021. Permalink

Events culminating in the fall of 2020 set a course for much higher feed grain prices in the 2021 crop year. In June of 2020, USDA was projecting a record U.S. corn crop just shy of 16 billion bushels. However, the severe “derecho” windstorm of August 2020 damaged corn fields from eastern Nebraska to Ohio, the most costly thunderstorm event in U.S. history. By January 2021, with the damage assessments accounted for, the crop size was reduced to 14.2 billion bushels. In Brazil, corn production in the 2020/2021 marketing year was reduced due to heat and drought in critical corn producing areas.  Early season estimates of a record 4.3 billion bushel Brazilian corn crop ended with a disappointing 3.4 billion bushels. 

Then, China began buying feed grain. Imports of corn and sorghum to China had fallen to 202 million bushels in the 2018/2019 marketing year.  By the end of 2020/2021, these coarse grain import levels had grown to 1.35 billion bushels, with 1.41 billion projected for 2021/2022. In the U.S., thanks to record exports, corn days of use on hand at the end of the marketing year fell below the critical 40-day threshold to a 29-day supply to end 2020/2021, the lowest since the 27-day supply that ended the drought year of 2012/2013 (see Figure 1). 

Figure 1. U.S. corn average farm price and days of use on hand at the end of the marketing year, 2005/2006-2020/2021, 2021/2022 estimate

Tight supplies and strong demand caused grain prices to surge from the fall of 2020 through summer 2021. In August 2020, the national average price for corn in the U.S. was $3.12 per bushel. By July 2021, the average cash price was $6.12 per bushel, the highest since 2013.  With these prices as production incentives and normal weather forecasts, global corn production in the 2021/2022 marketing year is projected to break through the 45-billion bushel barrier (see Figure 2). Record crops are projected for major export competitors Brazil, Argentina, Ukraine, and Russia. U.S. days of use on hand at the end of the 2021/2022 marketing year is now projected to be a 35-day supply, a six-day increase compared to the year before.  

Figure 2. World Corn Production

These same forces will likely shape feed grain prices in 2022. As we wrap up the 2021 crop in the Northern Hemisphere, prices are still relatively high but profits next season will be squeezed by higher input costs. Export demand, driven by the need for feed in China, will continue to drive global corn consumption. 

With normal weather, the trend line corn yield in the U.S. for 2022 will be just above 178 bushels per acre, two bushels per acre higher than in 2021. Even if acres hold steady, that would mean a corn production increase over 2021 (add in higher beginning stocks as well). If total use is unchanged (largely impacted by the level of export competition), days of use on hand at the end of the 2022/2023 marketing year will likely continue to increase, putting downward pressure on prices.

Welch, J. Mark. “Corn and Sorghum Outlook.” Southern Ag Today 1(43.1c). October 18, 2021. Permalink

On September 28th, ICE cotton futures closed above a dollar for the first time since 2011. Over the past year, the cotton market has been bullish, with prices following a long-term upward trend. On April 1, 2020, at the start of the COVID pandemic, December 2021 cotton futures closed at a contract low of 54.37 cents, but since that point the contract price has increased nearly 95% as of October 1, 2021. 

A big driver in U.S. prices has been robust demand. Current USDA estimates for the 2020/21 marketing year have the U.S. exporting 16.37 million bales (Figure 1). As the estimate stands now, this would be the highest level of exports since 2005. China was the largest purchaser of U.S. upland cotton in the 2020/21 marketing year at 4.839 million bales, followed by Vietnam, Pakistan, and Turkey. Upland cotton sales to China were up 97% compared to the previous year. USDA export projections for the 2021/22 marketing year are currently at 15.5 million bales. Chinese demand will be a key factor going forward as questions persist about whether China can maintain current purchasing levels and about how much Chinese purchasing is attributable to the Phase 1 trade deal. Supply chain issues also continue across the globe, and higher U.S. prices have the potential to dampen U.S. export demand.

Current estimates have the U.S. with 11.19 million planted acres of cotton in 2021, down 900,000 acres from the previous year. Though planted acres are down, production is projected to be 3.9 million bales higher than the previous year at 18.51 million bales. Higher production estimates are a combination of a better yield outlook and a lower abandonment rate. Cotton production in 2020 was hampered by drought conditions in Texas and hurricanes in the southeast. The U.S. is projected to harvest 9.92 million acres in 2021, which is 1.64 million more acres than 2020 with an average yield of 895 lbs/acre. Currently, USDA has 65 percent of the U.S. crop rated as good or excellent which is 22 percentage points higher than last year. Most of the U.S. crop remains a couple of weeks behind schedule, and weather remains the determining supply factor after a period of wet weather and milder temperatures across much of the cotton belt. 

Bringing supply and demand together, U.S. ending stocks for the 2021/22 marketing year are projected at 3.7 million bales, which is a reasonably tight level. Looking ahead to the spring of 2022, the ratio of Dec’22 CBOT corn futures to Dec’22 ICE cotton futures can serve as an early projection for planted cotton acres. That ratio currently sits near 6.1, which is similar to last year. This suggests planted cotton acres of 11 or 12 million. The occurrence of dollar cotton, though, is exciting to producers and has the potential to push acreage higher. Assuming 12 million planted acres, a ten-year national average yield of 855 lbs/acre, a 15% abandonment rate, and keeping all else at 21/22 projections, this would suggest ending stocks at 3.87 million bales. This would be a minimal increase in ending stocks and suggests new crop futures prices trading around a comparable level to the current marketing year range.     

Figure 1. U.S. Cotton Exports 2000-2019, 2020 estimate, and 2021 projection.

Source: USDA WASDE, September 2021

Maples, William E. . “Cotton Outlook.” Southern Ag Today 1(43.1a). October 18, 2021. Permalink

Rice acreage decreased significantly from 3.04 million acres in 2020 to 2.54 million acres in 2021. This decrease can be attributed to higher corn and soybean prices, as well as to the typical crop rotation seen in rice production. The majority of U.S. rice acres are in long-grain rice with the USDA projecting 2.08 million planted acres for 2021. 

Long-grain rice production for 2021 is projected to be 144.2 million hundredweight, down 15.6% from 170.9 million hundredweight in 2020 (Figure 1). Despite the decrease in production, exports in 2021 are expected to remain steady at 65 million hundredweight. An average of 47% of U.S. rice production has been exported since 2008. Accounting for over 50 percent of exports, Japan, Mexico, Haiti, and Canada are by far the largest importers of U.S. rice.

The price of long-grain rice for the 2021 crop is projected to be up to $13.00/cwt (Figure 2). Rice prices in general have been trending upwards since 2016. Prices are still well below the $15.40/cwt received by producers in 2013 and are also below the $14.00/cwt Effective Reference Price used to calculate payments for the Price Loss Coverage (PLC) farm program. However, U.S. prices are still relatively high compared to Asian markets which makes it difficult for U.S. rice to remain competitive in those areas. This has contributed to exports remaining flat since 2017.   

Figure 1. Long-grain rice production, beginning stocks, ending stocks, and exports from USDA WASDE Report 2008-2021. * Projected

Figure 2. Long-grain rice marketing year average price from USDA WASDE Report and PLC Effective Reference Price. *Projected marketing year average price

Mills, Brian E. . “Rice Outlook.” Southern Ag Today 1(43.1b). October 18, 2021. Permalink