The week ending Friday, January 17 saw Mar’20 ICE cotton futures trend lower, bottom out as traders digested news of the recent Phase One trade deal, and then partially recover by week’s end. The Phase One deal’s potential impact remains uncertain, as one reporter noted: “The devil is in the details, and we don’t have any details.” Well, not many. The cotton details are on pages 6-3 and 6-16. My only conclusions are that 1) current tariff disruption shouldn’t get any worse, and 2) China is pledging to buy more U.S. agricultural products in general. How it affects cotton will ultimately be shown by large export sales of U.S. cotton to China. Another fundamental development this week that potentially benefits U.S. cotton exports is the passage of the U.S.-Mexico-Canada Agreement (USMCA).
This week’s trading saw strong volume, a modest uptrend in open interest, and mixed futures settlements, which suggests no clear pattern of new buying or selling. However, as of Tuesday the net long position of hedge fund speculators grew larger. As of Friday, January 17, the Mar’20 and Jul’20 ICE cotton futures contracts settled up a penny at 71.25 and 73.06 cents per pound, respectively, while the more distant Dec’20 future settled at 72.37 cents per pound.
A sampling of old crop options reflects the recent movements in the underlying futures. For example, an in-the-money 65 cent Jul’20 call option that cost 4.88 cents per pound on November 21 was now worth 7.97 cents per pound on January 16. Likewise, a 75 put option on Dec’20 (click here and scroll down for discussion) that cost 10.1 cents per pound on November 21 was worth only 6.14 cents per pound on January 17. Chinese and world cotton prices were mixed this week.
These last several months provide a ongoing example of market volatility. It can happen in both directions. If old crop futures continued to rise, I would view it as a selling/hedging opportunity. The Phase One agreement at least removes the risk of further tariffs making the situation worse. That might have been enough to scare away the remaining speculative shorts. But it’s another matter altogether whether it will lead to new export sales — at least, I’ll believe it when I see it. If the market gets discouraged in waiting for that evidence, old corp futures could retrace a bit of the recent rally.
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. This is especially relevant for new crop with reports of contracts (300-off basis contract offerings) probably trumping any meaningful hedging opportunity (at current prices, anyway).
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.