Early in the week ending Friday, August 16, 2019, Dec’19 ICE cotton futures recovered from the mid-57 cent level and stabilized around 58 cents per pound. Prices then rallied over a cent on Tuesday and trended slightly higher for the rest of the week. Old crop fundamental influences this week included a benchmark supply and demand report on Monday that painted a heavier picture for U.S. production and ending stocks. However, much remains to be seen. There was some slippage in cotton condition ratings amid field reports of heat/drought stress, especially on dryland acreage. A strong export sales report reflected normal expectations of higher export sales in response to recent lower prices.
As of August 13, the hedge fund speculators still had a near record net short position. While the build-up of this position has contributed to the decline of ICE cotton futures this summer, it also could set up a short covering rally if there is any unexpectedly bullish news. On a smaller scale, Tuesday’s cent-plus rise in futures was probably helped by the 2,280 ICE futures that were bought back by spec shorts.
On Friday, August 16, the Dec’19 and Jul’20 ICE cotton futures contracts settled at 60.13 and 62.52 cents per pound, respectively. A sampling of options this week reflected the recent decline in old crop futures. For example, an out-of-the-money 65 cent Jul’20 call option traded around three cents on August 16, or about two cents cheaper than one month earlier.
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, or confirmation of lower U.S. planted acreage, and/or something else totally unexpected could trigger a 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 around 70 cents, including 3) merchants who have already contracted and will probably do some needed hedge selling.
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.