ICE cotton futures soared to new contract highs this week, despite the looming holiday weekend, scattered Texas rainfall earlier in the week, a rising dollar, and other potentially bearish influences. The nearby Jul’18 contract peaked on Monday, fell back to digest the situation, and then settled Friday up 1.75 cents to 89.21 cents per pound. New crop Dec’18 spent the first half of the week consolidating around 84 cents before launching higher to settle Friday at 86.65 cents per pound. Fundamental news this week looked like a repeat of last week: continued strong export shipments, scattered rainfall events across Texas, widespread rains in the southeastern U.S., and overnight support from Chinese cotton futures. The near term forecast for hot and mostly dry weather in northwestern Texas may also be shaping fundamental expectations and speculative buying.
A sample of option prices on ICE cotton futures saw some changes from the previous week because of changes in the underlying futures. On Thursday, May 24, a now-out-of-the-money 80 put option on Dec’18 cotton cost only 2.28 cents per pound (down from 3.73 cents per pound one week ago). Deeper out-of-the-money 75 and 73 puts on Dec’18 cost only 90 and 60 points, respectively. These values highlight the continuing opportunity to hedge minimum cash prices above projected costs of production.
This market remains supported by continued long speculative positioning and continued evidence of good demand, e.g., high U.S. export commitments and remaining potential mill fixations on Jul’18 futures. The net long position of hedge fund speculators (as of Tuesday) increased back to third highest level this calendar year. But there is some risk if these hedge fund longs get spooked by some unforeseen risk-off event. The April 4 Chinese tariff proposal is an example of such an event, although its effect was brief. Nobody ultimately knows how high these markets could go, including new crop Dec’18. The only thing you can know for sure is whether a forward 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 consider taking advantage of present (or future) 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. In hindsight, contracted 2017 bales could have been combined with call options on the deferred futures contracts. New crop put spread strategies to hedge the 2018 crop are a straightforward and relevant approach. Competitive bale and acre forward cash contract opportunities in West Texas have been available for months, e.g., 2.5 cents and 3.5 cents off Dec’18, respectively, for international base quality. Taking advantage of the present opportunity for selling or hedging at these levels was a main topic of conversation on the April 11 and May 11 Ag Marketing Network conference call.
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.