The federal Commodity Futures Trading Commission (CFTC) publishes a report showing the quantity of cotton that has been bought or sold where the sales price has not yet been fixed. This type of contracting is normally for basis contracts, which are also referred to as “on call” contracts. Textile mills routinely buy cotton from merchants using “on call” contracts. When these parties enter in to the “on call” contract, a futures contract would normally be sold to hedge the transaction. Later, when the mill actually fixes the price, that short futures position would be bought back. This could be done with options or futures. To the extent that mills don’t independently cover their options positions, their un-priced “on call” contracts are reflected in the current “on call” sales report, under “Unfixed Call Sales”, which is reported by individual futures contract.
Also, when the unfixed call sales outweighs the unfixed call purchases (by suppliers) the implication is that there will potentially be a lot of futures buying as mills hit the deadline of their “on call” contracts, fix the price, and the associated short hedges are bought back. We have seen this before in the last few years, e.g., during June of 2013. There was a lot of thinking that on call buying would support or lift cotton prices during 2014 and 2017, but the historically large discrepancies between unfixed call sales and purchases appeared to resolve themselves without explosive rallies. Perhaps this was because the reported sales were not true biz to biz sales, e.g., they were consignment sales within big merchant shippers. A similarly large discrepancy in 2016 appeared to have some influence on upward price volatility, but also eventually resolved itself quietly. A large discrepancy in 2018 was eventually resolved with mill fixations on Jul’18 during the nine cent sell-off in ICE futures in mid-June, 2018. The smaller discrepancies that existed with the Spring 2019 contacts were resolved without much of any upside price volatility.
Focusing on the new crop, as of December 6, the Mar’20, May’20, and Jul’20 contracts show an excess of unfixed call sales over purchases that implies 2.3 futures bought back for every one sold when the related on-call contracts are finalized. This is not as extreme a discrepancy, and hence not as bullish a signal, as in previous years. In addition, the combined unfixed call sales total for the spring contracts is less than half the level of what was observed during the previous two marketing years. The reason for this is because relatively little of the 2019 crop has been bought, and of that, relatively little has been hedged.
There is another bearish implication from these CFTC data. Unfixed call purchases (mostly on the near term contracts) remain at an historically high level. This implies that merchants haven’t fixed much of their contractual purchases from growers by selling futures, i.e., the merchants are relatively un-hedged. The large unfixed call purchases number implies that there will eventually be a lot of hedge selling which, all things being equal, will weigh on futures prices.