The week ending Friday, March 8, 2019 saw ICE cotton futures gyrate within a 150 point range, including 148 points higher (on Tuesday) and 110 points lower (on Thursday). While trading volume was decent, open interest declined a little and bottomed. Fundamental influences this week included a few positive sounding opinions about progress towards a resolution to the U.S.-China commodity tariffs. Friday saw minor adjustments in a neutral WASDE report from USDA. Of particular note were very few adjustments to forecasted cotton trade variables, with USDA possibly waiting like the rest of us for clarity in the U.S.-China trade situation. Weekly export data as of February 28 showed modest new sales and improving export shipments. The net short hedge fund position shrank about 3,000 contracts this week, having peaked two weeks ago.
The most active May’19 contract settled on Friday at 73.49 while the Jul’19 and Dec’19 contracts settled the week at 74.63 and 73.50 cents per pound, respectively. Chinese prices trended lower while world prices were more mixed this week.
A sample of option premiums on ICE cotton futures saw slight changes associated with the fluctuations in the underlying futures. For example, with Thursday’s futures price weakness, an in-the-money 75 put on Dec’19 cotton settled Thursday at 5.05 cents per pound, while an out-of-the-money 68 put traded for 1.70 cents per pound. The large gains in at-the-money put options purchased last fall shows how put options provide a mechanism for down-side price insurance.
The last month provides another example of the ever present risk of unexpected market volatility. It can happen in both directions. For example, a concrete resolution to U.S.-China trade relations, or another surprisingly large cut in U.S. planted acreage, or something else totally unexpected could trigger speculative buying. 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 world of contracting and hedging in the upper 70s, and 3) nobody ultimately knows the direction of prices. 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.
Given all these uncertainties, growers should always be poised and ready to take advantage of rallies, and protect themselves from sudden sell-offs. Forward contracting of new crop bales, immediate post-harvest contracting of old crop bales, and/or various options strategies can be used to limit downside risk while retaining upside potential. Hedges with puts or put spreads on Mar’19 futures could have been employed as late as November to provide near term protection of old crop bales through the harvest season. Cash contracted 2018 bales could be combined with call options on the deferred futures contracts. New crop put strategies to hedge the 2019 crop are a straightforward and relevant approach — especially if there is a rally in Dec’19 futures. There are a some forward contract offerings with a competitive basis, but with capped (at 31-3-36 quality) premiums and expanded discounts. I am unaware of how much business is being transacted with these contracts.
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.