Cotton Marketing Planner
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Friday, August 2, 2019
The week ending Friday, August 2, 2019 saw Dec’19 ICE cotton futures trade sideways, then take two big stair-steps downward on Thursday and Friday. The trigger appeared to be another sudden policy announcement that exacerbated the U.S.-China tariff situation. New crop fundamental influences this week included improved crop development/condition and strong new crop weekly export sales. However, the impact of hot dry conditions on the yield potential blooming cotton in the southwestern region may be an emerging issue.
As of July 30, the hedge fund speculators reflected another near record net short position. While this has contributed to the decline of ICE cotton futures, it also could set up a short covering rally if there is any unexpectedly bullish news.
On Friday, August 2, the Dec’19 and Mar’20 ICE cotton futures contracts settled at 59.42 and 60.71 cents per pound, respectively. The distant Dec’20 settled at 63.70 cents per pound. A sample of put option premiums on ICE cotton futures reflected higher premiums due to the decline in the underlying futures. For example, an in-the-money 75 put on Dec’19 cotton that settled at 9.47 cents per pound on June 6 now settled at 12.84 cents per pound on August 1. An out-of-the-money 68 put traded for 6.41 cents per pound on August 1, up two cents from its June premium.
These last several months provide a ongoing example of market volatility. It can happen in both directions. For example, an unexpected resolution to U.S.-China trade relations, or confirmation of lower U.S. planted acreage, and/or something else totally unexpected could trigger a short covering rally. If that happens, I would view such a rally as a selling/hedging opportunity since 1) spec driven rallies tend to be short lived, 2) I would expect a lot of contracting and hedging around 70 cents, including 3) merchants who have already contracted and will probably do some needed hedge selling.
The only thing known with certainty is that nobody ultimately knows the direction of prices. Therefore the most relevant question is always whether a cash contract or a hedge on today’s futures price will be a profitable, or at least survivable, price floor.
For further analysis and discussion of near term price behavior, click on the featured link in the right sidebar menu link entitled “Near Term Influences”. Longer term price behavior is more influenced by fundamental supply and demand forces, which is discussed above under the “Market Fundamentals and Outlook”, click on the right sidebar featured link.)