The week ending Friday, July 12, 2019 saw Dec’19 ICE cotton futures slide to new life-of-contract lows on Tuesday, then trade sideways-to-lower for the remainder of the week. New crop fundamental influences this week included improved crop development/condition, poor new crop weekly export sales, and moderately bearish WASDE numbers. The old crop cash market continued at a slow pace this week.
As of July 9, the hedge fund speculators reflected another record net short position. While has led to an erosion of futures prices, it also could set up a short covering rally if there is any unexpectedly bullish news.
On Friday, July 12, the Dec’19 and Mar’20 ICE cotton futures contracts settled at 62.68 and 63.74 cents per pound, respectively. The distant Dec’20 settled at 65.56 cents per pound. A sample of put option premiums on ICE cotton futures reflected higher premiums due to the decline in the underlying futures. For example, an in-the-money 75 put on Dec’19 cotton that settled at 9.47 cents per pound on June 6 now settled at 12.43 cents per pound on July 11. An out-of-the-money 68 put traded for 6.37 cents per pound on July 11, up two cents from a month earlier.
These last several months provide a ongoing example of market volatility. My longer term outlook is bearish, but sharp price adjustments can, and perhaps will, 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.