For the week ending Friday February 17, 2017, the most active May’17 ICE cotton declined two and a half to three cents in what resembled a ball rolling off a hill. Market activity this week continued the recent pattern of high volume spread trading, some of which remained associated with regularly scheduled fund rolling. May’17 and Dec’17 futures settled on February 17 at 75.52 and 73.76 cents per pound, respectively. Friday’s weekly lows were attributed to technical selling. The old-new crop spread of Jul:Dec remained inverted by 2.71 cents at Friday’s settlement, which represents about a once cent narrowing over recent weeks. A 70 cent call option on Jul’17 settled on February 17 at 7.45 cents per pound , while a 76 call was worth 3.87 cents. From a new crop perspective, 70 and 73 cent put options on Dec’17 settled at 2.75 cents and 4.12 cents per pound, respectively. Out of the money 63 and 66 cent put options on the same contract cost 0.84 cents and 1.46 cents per pound, respectively. Chinese and world cotton prices were mixed this week.
Cotton specific news this week included moderate weekly export sales bookings, in keeping with the expected price quantity demand relationship. Another record high hedge fund net long position was in play as of Tuesday February 14, although declining open interest and lower price settlements suggest some long liquidation through Thursday’s session. 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 last Friday (click here and scroll down).
Current marketing strategies to consider might include 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 seven cents per pound, a 70:76 July call spread would cost half that (circa February 17). 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, which can be had for less than three cents per pound on February 17.
I continue to hear from Texas growers and merchants about favorable basis terms to forward contract a few 2017 bales. There are also acre-type contracts (e.g., capped by your APH) that would allow growers to lock in something near 70 cents. 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.