Cotton Marketing Planner
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Friday, June 7, 2019
The week ending Friday, June 7, 2019 saw ICE cotton futures rally on Monday, chop sideways into Wednesday, downshift through Thursday, and decline sharply at week’s end. Fundamental news this week included export sales that were unexceptional by the numbers, albeit pretty good by the calendar The old crop cash market continued its slow motion pace this week. Meanwhile, new crop fundamentals remained focused on the somewhat improved planting pace in the Southern Plains and Delta region, and a forecast for needed moisture in the Southeast.
As of June 4, the hedge fund speculators still reflected a large net short position. This week saw high volume trading, which precedes the normal high volume spread trading associated with the Goldman Roll (which began Friday, June 7th) and the AIG Roll (beginning June 10).
On Friday, June 7, the Jul’19 and Dec’19 ICE cotton futures contracts settled at 65.59 (-3.00) and 65.51 (-1.16) cents per pound, respectively. The distant Dec’20 settled at 65.76 cents per pound. A sample of put option premiums on ICE cotton futures saw over the last two weeks. For example, an in-the-money 75 put on Dec’19 cotton settled Thursday, June 6 at 9.47 cents per pound. An out-of-the-money 68 put traded for 4.25 cents per pound.
This week provides a ongoing example of market volatility. My longer term outlook is bearish, but sharp price adjustments can, and perhaps will, 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 speculative buying. 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 world of contracting and hedging in the upper 70s, and 3) merchants who have already contracted will probably do some needed hedge selling, and 4) nobody ultimately knows the direction of prices. 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.
Given all these uncertainties, growers should always be poised and ready to take advantage of rallies, and protect themselves from sudden sell-offs. Forward contracting of new crop bales, immediate post-harvest contracting of old crop bales, and/or various options strategies can be used to limit downside risk while retaining upside potential. New crop put strategies to hedge the 2019 crop are now mostly a rear-view-mirror thought. But if something causes a sharp rally back into the 70s, put-based strategies would again be a straightforward and relevant approach. There are a some forward contract offerings with a competitive basis, but with capped (at 31-3-36 quality) premiums and expanded discounts. I heard more from growers about these contracting opportunities back when Dec’19 traded above 77 cents.
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.)