The week ending Friday June 9 saw the nearby Jul’17 gyrate up and down in a slight weekly downtrend, which was accentuated with USDA’s release of new old crop estimates and new crop projections on Friday. Jul’17 settle down 86 points on Friday at 75.69 cents per pound. Dec’17 futures settled 61 points lower at 72.49 cents per pound, about one third of a cent lower than the previous Friday. The inverted old-new crop spread of Jul:Dec narrowed from 4.30 cents two weeks ago to 3.20 cents as of Friday’s settlement. A 70 cent call option on Jul’17 settled on June 9 at 5.72 cents per pound , while a 76 call was worth 0.75 cents. From a new crop perspective, 73 and 75 cent put options on Dec’17 settled at 3.73 cents and 4.92 cents per pound, respectively. Out-of-the-money 66 and 67 cent put options on the same contract cost 1.12 cents and 1.36 cents per pound, respectively. Chinese and world cotton prices were mixed this week.
Other cotton specific news included more rainfall events across Texas and the eastern Cotton Belt. The week saw modest old crop export sales, and continued decent sales for the next marketing year. 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 considerable 6,820 contracts week over week, but still remains at historically high levels.
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 at over five cents per pound, a 70:76 July call spread would cost less (circa June 9). If a grower had employed either the call or the call spread strategy back in January, the decision in April and May would have been 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.