The week ending Friday July 14 saw the most active Dec’17 contract stair-step roughly two cents lower. Dec’17 settled Friday at 66.58 cents per pound. Deep in-the-money 73 and 75 cent put options on Dec’17 cotton settled Friday at 7.27 and 8.97 cents per pound, respectively. Near-the-money 66 and 67 Dec’17 puts settled at 2.59 and 3.11 cents per pound, respectively. Out-of-the-money 73 and 79 call options on Dec’17 settled at 0.85 and 0.26 cents per pound. World and Chinese cotton prices were mixed/higher this week. Commodity markets were generally higher this week, in concert with a weakening of the U.S. dollar index.
Cotton specific news this week included disappointed expectations for U.S. abandonment and U.S. exports of new crop being revised upward in Wednesday’s WASDE. Concerns about greater abandonment of West Texas cotton are being circulated, but the picture remains ultimately uncertain until the August field sampling by NASS. Exports sales for the current and future marketing year remained decent considering it was during the holiday period. Significant rainfall accumulations this week (through Friday) stretched from southeastern Texas to the Atlantic seaboard. The massive liquidation of the hedge fund net long position continued through July 11, and likely explains the price weakness seen on Monday.
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 0.85 cents per pound (circa July 14), a 73:79 Dec call spread would cost 0.59 cents. A relevant strategy to look at for unsold/uncommitted 2017 bales would have been buying put spreads on Dec’17 futures — this could still be a relevant strategy if Dec’17 futures rally back into the low/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.