For the holiday-shortened week ending Friday February 24, 2017, the most active May’17 ICE cotton traded sideways for two days before rising a cent over the next two days. The pattern of trading returned to normal volume, with a mixed pattern of price settlements and open interest. May’17 and Dec’17 futures settled on February 24 at 76.57 and 73.98 cents per pound, respectively. The old-new crop spread of Jul:Dec remained inverted by 3.52 cents at Friday’s settlement, which represents about slight widening over the previous week. A 70 cent call option on Jul’17 settled on February 24 at 8.29 cents per pound , while a 76 call was worth 4.32 cents. From a new crop perspective, 70 and 73 cent put options on Dec’17 settled at 2.64 cents and 3.98 cents per pound, respectively. Out-of-the-money 63 and 66 cent put options on the same contract cost 0.79 cents and 1.39 cents per pound, respectively. Chinese and world cotton prices were mixed this week.
Cotton specific news this week included preliminary (and fairly neutral) world and U.S. cotton supply and demand forecasts from USDA. This week also saw strong weekly export sales bookings, in keeping with the expected price quantity demand relationship. The hedge fund net long position decreased a bit, but was still the fourth highest since 2006 (which is as far back as our database goes). The potentially strong influence of a lot of unfixed call sales remained this week as a potential catalyst for old crop price strength. All of these influences were discussed in the February Ag Market Network conference call two weeks ago (click here and scroll down).
The 2016 crop was a good (now past) example of combining one’s sold (or 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 at over eight cents per pound, a 70:76 July call spread would cost half that (circa February 24). If a grower had employed either the call or the call spread strategy a month ago, the decision now would be when to take profits. A relevant strategy to look at for the 2017 crop could involve something like buying put spreads on Dec’17 futures.
In the last month I heard from Texas growers and merchants about favorable basis terms to forward contract a few 2017 bales or acres. Some of the contracts I heard about would allow growers to lock in something near 70 cents. I can’t confirm whether those offerings are still available as of this week. I doubt 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.