June 18, 2014
The cotton market has moved sideways for the last month following a sharp drop in May. July ’14 futures (old crop) has traded slightly above 85¢ and December ’14 (new crop) has traded around 77¢. The 8 to 10¢ gap between old and new crop futures indicates fairly tight available supplies outside of China. But, lower new crop prices suggest more 2014 crop supplies are expected. Therefore, December ’14 futures may remain above 76¢ until new crop cotton becomes available this fall.
The price this fall depends mainly on favorable growing conditions and little change in Chinese policy. Yet, December ’14 futures price above 80¢ will face stiff resistance. Based on good crop conditions, a possible 16.5 million bale U.S. crop could push prices toward 70¢ by harvest time.
Texas cotton conditions have improved substantially since Memorial Day and are much better than a year ago. Although several weeks late, recent rains have provided moisture to plant most dryland acreage intended. Texas growers expect to plant a total of 6.4 million dryland and irrigated acres of cotton. However, West Texas dryland cotton will need timely rains and warm growing weather into October.
Also, strong exports are needed because 75% of U.S. cotton should be exported. Projected 2014/15 foreign production is expected to trail foreign use by 7.7 million bales. That is the largest foreign production versus use deficit in three years. The larger foreign production versus use gap will provide some needed strength for the U.S. export market.
The market price leans to the bearish side because of slow sales, too much cotton in China, and surplus world stocks. World stocks-to-use (su) is a record 91% for the 2014/15 season. However, the world su is extremely divided between China with 164%; foreign minus China, 53%; and U.S., 32%. Cotton from the U.S. is desirable because of excellent manufacturing qualities.
Volatile futures price movements are likely. Price risk will continue.
Last month an option spread strategy was discussed of buying an 80¢ December ’14 put option for 3.00¢ and selling a December ’14 90¢ call for 1.81¢. The net cost was 1.19¢ plus commission fees. On June 17, the 80¢ December ’14 put traded at 5.71¢. The 90¢ call was valued at 0.44¢. The spread could have been lifted by buying the 0.44¢ call back, leaving downside protection at 80¢ floor. The net put cost would be less than 2.00¢.