The week ending Friday July 28 saw the most active Dec’17 contract trade mostly in a sideways one cent range around 68 cents. Thursday saw an intra-session high of 69.72 which was attributed to commercial buying within a larger commodity rally in response to U.S. dollar weakness. Dec’17 settled Friday at 68.80 cents per pound. Deep in-the-money 73 and 75 cent put options on Dec’17 settled Friday at 5.46 and 7.03 cents per pound, respectively. Meanwhile, near-the-money 66 and 67 cent puts on Dec’17 settled Friday at 1.57 and 1.96 cents per pound, respectively. 73 and 79 cent call options on Dec’17 settled Friday at 1.26 and 0.36 cents per pound Chinese cotton prices were slightly lower this week, while world prices were more mixed. Commodity markets were generally higher this week, in concert with a weakening of the U.S. dollar index.
Cotton specific news this week included continued uncertainty about possibly lower yields/higher abandonment from hot dry weather in Kansas, Oklahoma, and Texas. In addition, extreme flooding in the major cotton growing regions of India is creating uncertainty about the net effect of cotton production. Combined exports sales for the current and future marketing year remained decent.
Since we are in an uncertain weather market situation, 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. Forward contracting and/or various options strategies can be used to limit downside risk while retaining upside potential. Physical bales that have been forward contracted could also be combined with call options on Dec’17 ICE cotton. For example, while an out-of-the-money 73 cent Dec’17 call costs 1.26 cents per pound (circa July 28), a 73:79 Dec call spread would cost 0.90 cents. A relevant strategy to look at for unsold/uncommitted 2017 bales would have been buying put spreads on Dec’17 futures — this could still be a relevant strategy if Dec’17 futures rally back into the low/mid-70s range.