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 (see figure below). The smaller discrepancies that existed with the Spring 2019 contacts were resolved without much of any upside price volatility. The level of unfixed call sales was back at record high levels for the Spring 2022 contracts. The fixations of these positions contributed to the upward price volatility through mid 2022. Since the two major price plunges in ICE futures this year, there has been a lot of mill fixations, as evidenced by the declining red line in the figure below.
As of October 20, 2023, the Dec ’23 ICE cotton contract shows an excess of unfixed call sales over purchases that implies only 0.8 futures bought back for every one sold when the related on-call contracts are finalized — a bullish influence on the Dec’23 futures contract, which is maturing anyway. A neutral implication exists when considering the 1.2 ratio of unfixed call sales and purchases across all contracts. While the three Spring 2024 contracts in isolation do have a combined ratio of 4.9 unfixed call sales for every unfixed call purchases, they do not represent a large enough number of contracts to matter at this point. Plus the overall level of unfixed call sales is historically low, as illustrated by the lower level of the red line below.