The the week ending July 13 saw ICE Dec’18 cotton futures trade sideways between 84.50 and 86.50 until surprisingly tight WASDE adjustments saw prices shoot up the four cent limit. The price response may have resulted from a one-two combination of a surprisingly large cut in U.S. production plus a surprisingly large increase in Chinese consumption, which perhaps then triggered technical jet fuel, e.g., buy stops. At any rate, Friday’s trading was a little lower. The pattern of rising open interest and higher settlements in the latter half of the week indicated new speculative buying. Other fundamental influences this week included decent new crop export sales, weaker export shipments, and scattered rainfall which got thinner the further west it was over Texas. Risk on/off reactions to the U.S. China trade dispute appeared highly influential this week in stock, bond, and commodity markets, including ICE cotton.
Dec’18 settled down 70 points at 87.84 cents per pound on Friday; Dec’19 settled 6.5 cents below that at 81.34 cents. A sample of option premiums on ICE cotton futures saw changes from the previous week because of the rise in the underlying futures price. On Thursday, July 12, a near-the-money 90 cent put option on Dec’18 cotton cost 5.64 cents per pound, which was cheaper than the week before. Similarly, 85, 83, and 80 puts on Dec’18 settled lower Thursday at 3.05, 2.07, and 1.37 cents per pound, respectively. These values highlight the continuing opportunity to hedge minimum cash prices above projected costs of production. An in-the-money 85 call on Jul’19 cotton cost 8.15 cents, while a near-the-money 90 call was 5.96 cents per pound.
This market remains appears to have been lifted again by long speculative positioning, and emerging fundamental factors. The speculative support under prices always comes with a risk that hedge fund longs might get further spooked by some unforeseen risk-off event, be it trade or weather related (e.g., a good rain in Texas). On the other hand, a surprise resolution to U.S.-China trade relations or damaging weather could increase speculative buying again. I would not at all be surprised by one more good weather rally in the next six weeks. Nobody ultimately knows how high or low these markets could go. 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. Contracted 2018 bales could be 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 were available earlier in the Spring, but the ongoing drought conditions and price volatility have put a damper on that. So grower hedging may be the main tactic to take advantage of the present opportunity.
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.