The week ending Friday, November 22 saw the most active Mar’20 ICE cotton futures contract glide lower til it touched down on the tarmac for the latter half of the week (see above, courtesy of Barchart.com). In so doing, prices traversed back to the lower end of the longstanding price range. The scant fundamental news included tolerable well export sales (through November 14), and there continued to be slippage in cotton crop condition ratings.
The week ending Thursday November 21 saw declines in both open interest and futures settlements, suggesting long liquidation. The last big reduction in hedge fund shorts was between October 15-22, and this was partially reversed during November, i.e., the short position began to grow again.
As of Thursday, November 21, the Mar’20 and Jul’20 ICE cotton futures contracts settled at 64.01 and 66.14 cents per pound, while the more distant Dec’20 future settled at 66.56 cents per pound. A sampling of old crop options reflects the recent movements in old crop futures. For example, a near-the-money 65 cent Jul’20 call option cost 4.88 cents per pound on November 21, having decreased in value with the decline in Jul’20 futures this week. Likewise, a deep in-the-money 75 put option on Dec’20 (click here and scroll down for discussion) cost 10.1 cents per pound on November 21, which is more expensive with the decline in Dec’20 futures. Chinese and world cotton prices trended lower this week.
These last several months provide a ongoing example of market volatility. It can happen in both directions. For example, as new crop supplies being to flood in later this fall, there will be fundamental pressure on prices. On the other hand, detailed confirmation of a resolution to U.S.-China trade relations, or an unexpected downshift in yield expectations, or something else totally unexpected could trigger more short covering. 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 in the mid/upper 60s, including 3) merchants who have already contracted and will probably do some more needed hedge selling, just like they did on October 3, and bearish old crop fundamentals will likely take prices lower eventually.
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.