The week ending Thursday April 13 saw an early, pre-WASDE rally on Monday followed by a post-WASDE reset and sideways trading dominated by fund rolling. The nearby May’17 ICE cotton settled on Thursday at 75.62 cents per pound. The now-most active Jul’17 settled at 76.54, while Dec’17 futures settled at 73.42 cents per pound. The old-new crop spread of Jul:Dec remained inverted by 3.12cents at Thursday’s settlement, which represents a narrowing of that spread over previous weeks. A 70 cent call option on Jul’17 settled on April 13 at 6.99 cents per pound , while a 76 call was worth 2.78 cents. From a new crop perspective, 73 and 75 cent put options on Dec’17 settled at 3.65 cents and 4.76 cents per pound, respectively. Out-of-the-money 66 and 67 cent put options on the same contract cost 1.11 cents and 1.35 cents per pound, respectively. Chinese and world cotton prices were both mixed this week.
Cotton specific news this week included a USDA WASDE report showing moderately bearish world adjustments and bullish, if not already anticipated, adjustments to U.S. exports (higher) and ending stocks (lower). On Thursday the market also digested another good weekly export sales bookings, especially considering the price level. 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 decreased a bit, but remains at an historically high level. 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 April Ag Market Network Conference Call (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 almost seven cents per pound, a 70:76 July call spread would cost less (circa April 13. If a grower had employed either the call or the call spread strategy in January, the decision now would be when to take profits (ideally back in March). A relevant strategy to look at for the 2017 crop could involve something like buying put spreads on Dec’17 futures.
Since February I have heard 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 a price at or above 70 cents. Many of those offerings were still available as of this the first week of April. 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.