Cotton Market Update for the Week Ending Friday, October 11, 2019

The week ending Friday, October 11 saw ICE cotton futures continue the sideways pattern since mid-September.  The Dec’19 traded in a narrow 90-point band until settling nearly 2.5 cents higher on Friday’s news of a partial trade deal between the U.S. and China.  Other fundamental news this week included 1) neutral WASDE adjustments to bearish U.S. ending stock levels,  2) another seasonally normal export sales report, 3) slight slippage in cotton crop condition ratings, and 4) an early, hard freeze in the southern plains.

As of Thursday, October 10, the Dec’19 and Jul’20 ICE cotton futures contracts settled at 61.42 and 63.28 cents per pound. A sampling of old crop options reflects the stabilization/uptick in old crop futures over the last two weeks.  For example, an out-of-the-money 65 cent Jul’20 call option that traded for 3.15 cents per pound on September 26 was now worth 3.57 cents per pound on October 10.   Likewise, a deep in-the-money 75 put option on Dec’19 lost a little value, settling on October 10 at 13.64 cents per pound (down from 14.82 cents two weeks ago).  With Friday’s higher settlement of Dec’19 at 63.88 (+2.46) cents per pound, put option premiums eroded more.

Chinese and world cotton prices trended higher this week.

These last several months provide a ongoing example of market volatility. It can happen in both directions.  For example, an unexpected resolution to U.S.-China trade relations (hinted on October 11), or an unexpected downshift in yield expectations, or something else totally unexpected could trigger another short covering rally.  If that happens, I would view such a rally as a selling/hedging opportunity since 1) spec driven rallies tend to be short lived, 2) I would expect a lot of contracting and hedging in the mid/upper 60s, including 3) merchants who have already contracted and will probably do some more needed hedge selling, just like they did on October 3.

The only thing known with certainty is that nobody ultimately knows the direction of prices.  Therefore the most relevant question is always whether a cash contract or a hedge on today’s futures price will be a profitable, or at least survivable, price floor.

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.

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