The week ending Friday May 19 saw a slide from Monday’s limit up, contract highs (87.18 cents per pound) to under 79 cents per pound by week’s end. Dec’17 was only slightly pulled along for the ride. Friday saw the Jul’17 settle up a little higher on the day at 79.45 cents per pound. Dec’17 futures settled Friday at 73.45 cents per pound, within a third of a cent of where it settled the week before. The inverted old-new crop spread of Jul:Dec narrowed to 6.00 cents at Friday’s settlement. A 70 cent call option on Jul’17 settled on May 19 at 9.56 cents per pound , while a 76 call was worth 4.34 cents. From a new crop perspective, 73 and 75 cent put options on Dec’17 settled at 3.48 cents and 4.58 cents per pound, respectively. Out-of-the-money 66 and 67 cent put options on the same contract cost 1.00 cents and 1.23 cents per pound, respectively. Chinese and world cotton prices both followed a rise-and-fall pattern over this week.
Stock, commodity, and currency markets were volatile this week in the wake of political uncertainties in the U.S. and Brazil. Cotton specific news included continuing good weekly export sales bookings. The weekly variation in export sales fit the expected relationship to price variations around the general upward trend in both export sales and prices. The hedge fund net long position increased a lot as of Tuesday May 16, remaining at historically high levels. The potentially strong influence of a lot of unfixed call sales on Jul’17 remained this week as a potential catalyst for, and perhaps explanation for, old crop price strength in the three sessions between May 11 and May 15.
The 2016 crop was a good (now past) example of combining one’s sold/committed 2016 crop with call options on Jul’17 ICE cotton. For example, while a deep in-the-money 70 cent July call is obviously expensive now at over nine cents per pound, a 70:76 July call spread would cost roughly half that (circa May 9). If a grower had employed either the call or the call spread strategy back in January, the decision would be when to take profits. A relevant strategy to look at for the 2017 crop could involve buying put spreads on Dec’17 futures.
Since February I have heard about favorable basis terms to forward contract 2017 bales or acres. Some of the contracts I heard about would allow growers to lock in a price at or above 70 cents. Many of those offerings were still available as of this week. I doubt that these favorable basis terms will last forever, especially with a potentially large crop coming this year. In any case, growers should be poised and ready to quickly take advantage of new crop price rallies, especially if they are mostly driven by short-lived speculative buying or mill fixing. Forward contracting and/or various options strategies can be used to limit downside risk while retaining upside potential.