The week ending Friday August 18 saw ICE cotton futures take three stair-steps down and maybe a half-step back up by week’s end. Friday’s slight recovery saw Dec’17 settling up 37 points at at 67.28 cents per pound, roughly a cent lower than the previous Friday. Dec’17 remained inverted over Mar’18 by 22 point as of Friday’s settlement. Deep in-the-money 73 and 75 cent put options on Dec’17 settled Friday August 18 at 6.37 and 8.12 cents per pound, respectively. Near-the-money 66 and 67 cent puts on Dec’17 settled Friday August 18 at 1.83 and 2.29 cents per pound, respectively. Meanwhile, 73 and 79 cent call options on Dec’17 settled Friday August 18 at 0.65 and 0.17 cents per pound Chinese cotton prices were mixed this week, while world prices trended slightly lower.
Other cotton specific news this week included a modest export sales report. The market weakness early in the week may have resulted from a combination of weekend rains in West Texas and an uptick in crop condition rating (released Monday afternoon). The production, carryover and price outlook remain uncertain.
Since we are in an uncertain weather market situation, growers should be poised and ready to quickly take advantage of any unexpected price rallies. 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 0.65 cents per pound (circa August 18), a 73:79 Dec call spread would cost a little cheaper at 0.48 cents. A relevant strategy to look at for unsold/uncommitted 2017 bales would have been buying put spreads on Dec’17 futures back when they were trading in the lower to mid 70s. This could still be a relevant strategy if some unexpected event rallies Dec’17 futures back into the lower to mid 70s.
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.