The week ending March 10 saw the most active May’17 ICE cotton gyrate higher and lower in a general downward trend between 79 and 77 cents. At week’s end, May’17 and Dec’17 futures settled at 77.29 and 75.29 cents per pound, respectively. The old-new crop spread of Jul:Dec remained inverted by 3.08 cents at Friday’s settlement, which represents a narrowing over the previous week. A 70 cent call option on Jul’17 settled on March 10 at 8.85 cents per pound , while a 76 call was worth 4.45 cents. From a new crop perspective, 73 and 75 cent put options on Dec’17 settled at 3.29 cents and 4.26 cents per pound, respectively. Out-of-the-money 66 and 67 cent put options on the same contract cost 1.10 cents and 1.31 cents per pound, respectively. Chinese and world cotton prices rose and fell this week.
Cotton specific news this week included moderately bullish cotton numbers from USDA and decent weekly export sales bookings (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 increased to another record level (at least since 2006). 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 March Ag Market Network conference call (click here and scroll down) in addition to this Southwest Farm Press column.
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 under nine cents per pound, a 70:76 July call spread would cost half that (circa March 10). If a grower had employed either the call or the call spread strategy a month or two 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.
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. I can’t confirm whether those offerings are 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. With a major planting intentions report coming from USDA in a few weeks, I think some kind of price protection should be in place before then.