The week ending Friday June 23 saw the most active Dec’17 take two stair-steps downward from 70 cents to below 67 cents per pound, finally settling for the week at 67.02. A 73 cent call option on Dec’17 settled on June 22 at 1.28 cents per pound , while a 79 call was worth 0.46 cents. Deep in-the-money 73 and 75 cent put options on Dec’17 settled at 7.26 cents and 8.89 cents per pound, respectively. Near-the-money 66 and 67 cent put options on Dec’17 cost 2.81 cents and 3.30 cents per pound, respectively. Chinese cotton futures prices were mixed this week while world prices trended lower.
This week saw continued dryness and extreme heat, especially over Texas, which likely contributed to a slightly worsening U.S. drought picture and slightly declining (but still good) U.S. cotton crop condition ratings. Tropical Storm Cindy and a follow-up weekend cool front represented a break to the hot and dry pattern, but it remains to be seen how the emerging crop in northwestern Texas will fare. This week saw improved old crop export sales, and outstanding sales for the next marketing year. The weekly variation in export sales fit the expected relationship to price variations around the general upward trend in both export sales and prices. The hedge fund net long position in ICE cotton continues to decline from historically high levels.
Since we are in an uncertain weather market situation, growers should be poised and ready to quickly take advantage of new crop price rallies, especially if they are mostly driven by short-lived speculative buying. Forward contracting and/or various options strategies can be used to limit downside risk while retaining upside potential. Physical bales that have been forward contracted could also be combined with call options on Dec’17 ICE cotton. For example, while an out-of-the-money 73 cent Dec’17 call costs 1.28 cents per pound, a 73:79 Dec call spread would cost just over 82 points (circa June 22). A relevant strategy to look at for the 2017 crop could involve buying put spreads on Dec’17 futures, especially if Dec’17 futures rally back into the mid-70s range.
For further analysis and discussion of near term price behavior, click on the menu above entitled “Near Term Influences”. Longer term price behavior is more influenced by fundamental supply and demand forces, which is discussed above under the “Market Fundamentals and Outlook” menu tab.