NY futures exploded to the upside this week, with March rallying 1645 points to close at 169.39 cents, while December advanced 816 points to close at 113.86 cents.
The melt-up scenario we have been talking about in previous reports has started to unfold. On Monday the March contract gapped above its last major resistance area and has since been trading in uncharted territory, posting one historic high close after another.
What amazes us is that there is no evidence of any widespread liquidation yet, since open interest in current crop futures has remained relatively steady. Although some shorts are clearly on the run, there are apparently plenty of new sellers willing to take their place. Open interest in March, May and July futures is still at around 15.0 million bales and the CFTC report shows the trade at 9.5 million bales net short as of January 18. Although this number has been dropping somewhat over the past few weeks, it remains at an elevated level and serves as potential fuel for an extension of this rally.
Next week the discussion about new crop plantings will be officially launched when the NCC announces its planted acreage estimate. Many analysts expect a sizeable increase in cotton acreage, not just in the US, but in other parts of the world as well. While we agree that growers will commit more acreage to cotton, we don’t think that the increase will be as steep as some analysts are predicting.
When we take a broader look at agriculture these days, we are presented with an entirely different scenario than just five or ten years ago. Only a few years back the US was being accused of depressing Ag prices via its generous farm subsidy program. Year after year US growers were producing big crops of food and fiber, whether there was a market for their products or not, simply because the government encouraged them to. Stocks were plentiful and farmers in countries without subsidies had a tough time making a living, let alone invest in infrastructure and equipment. Production was additionally enhanced by a quantum leap in seed technology, which boosted yields to a much higher plateau over the past decade.
However, the years of plenty seem to be over for now as consumption has more than caught up in recent years. There are a number of factors driving this consumption boom. The most obvious one is of course the emergence of a powerful new middle-class in countries like China, India, Brazil, Indonesia and Vietnam, just to name a few. Not only are there a lot more people in the world (7 billion by the end of this year), but they also consume more complex foods, i.e. animal protein. This is significant, because a meat-based diet requires roughly 8-10 times as many acres as a vegetarian diet.
In order to support a growing livestock production, an increasing amount of grains is being allocated to feed these animals. While 50 years ago cattle was still mostly grass fed in the US, they get about 55% from grains these days. Worldwide the percentage amounts to around 40%. In other words, while animals used to turn something that people can’t eat (grass) into something that people can eat (meat), they are now consuming more and more of our food (grains).
Best Regards
