For the week ending November 17, the maturing Dec’17 ICE cotton futures trended slightly lower and then a little higher in a 140 point range that breached 70 cents on Friday. Fund rolling out of the nearby contract continued as an influence. Fundamental news this week included marketing year high export sales which broke the normal pattern of export demand. Dec’17 ICE cotton futures settled the week at 69.78 cents per pound, which was 43 points over the Mar’18 and 7 points above Dec’18. May’18 and Jul’18 contracts both settled over 70 cents on Friday. A sample of option prices on ICE cotton futures saw relatively small changes from the previous week. On Thursday November 16, out-of-the-money 73 call options on Jul’18 ICE futures were worth 2.53 cents per pound; a further out-of-the-money 79 call on Jul’18 traded for 1.08 cents. Looking ahead to next year’s crop, a near-the-money 67 put option on Dec’18 cotton cost 3.06 cents per pound on Thursday, while an out-of-the-money 60 put on Dec’18 cost 0.95 cents. Chinese cotton futures and world price indices were both mixed this week.
Remaining upside volatility might come from surprising production forecasts over the next several months, coupled with continuing good export demand. There is also a risk to see futures weaken to the mid or lower 60s (re: Ag Market Network November Conference Call). But since that is all uncertain, growers should remain poised and ready to take advantage of unexpected rallies, and protect themselves from sudden sell-offs. Forward contracting, immediate post-harvest contracting, and/or various options strategies can be used to limit downside risk while retaining upside potential. In particular, contracted bales could also be combined with call options on the deferred futures contracts. It is also not too early to be evaluating the worth of put spread strategies to hedge the 2018 crop (or, really, to hedge the insurance base price). Hedgers still with put or put spread positions on Dec’17 need an exit plan wince the remaining time value will erode exponentially in October.
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.