The week ending Friday, February 15, 2019 saw ICE cotton futures slide a couple of cents on Monday and then stabilize between 71 and 72 cents. High volume fund rolling continued to be an apparent influence on cotton futures trading this week, in addition to some evidence of long liquidation. Fundamental influences early this week included apparent bearish reaction to the National Cotton Council’s publication of it’s annual grower planting intentions and economic outlook report. (For what it’s worth, the NCC analysis didn’t construe their acreage number as bearishly as I do.) The continuing release of decent export sales data (reflecting late December/early January) might have been more price supportive if it reflected the normal one week lag, but, but showed little market supporting effect this week.
The most active May’19 contract settled on Friday at 71.86 while the Jul’19 and Dec’19 contracts settled the week at 73.24 and 72.80 cents per pound, respectively. Chinese and world prices were mixed this week.
A sample of option premiums on ICE cotton futures saw slight changes associated with the decline in the underlying futures. For example, an in-the-money 75 put on Dec’19 cotton settled Friday, February 8 at 5.51 cents per pound, while an out-of-the-money 68 put traded for 1.95 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. Contracted 2018 bales could be combined with call options on the deferred futures contracts. Call option strategies have become increasingly affordable with the recent decline in the futures market. 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. So far there have not been much forward contracting business transacted for new crop bales, so hedging remains as one of the few available tools.
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.