Cotton Marketing Planner
Dr. John Robinson
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Thursday, October 11, 2018
The week ending Thursday October 11 saw ICE cotton futures rise and fall several times in a sideways gyration. Monday’s rally towards the weekly highs coincided with forecasts of Hurricane Michael’s intensity and likely pathway across Southwest Georgia, among other targets. Then futures downshifted and traded sideways, perhaps from pre-WASDE positioning. Hurricane Michael made landfall on Wednesday, and it’s potentially devastating effects remain to be seen. In particular, they were not reflected in Thursday’s WASDE report which was neutral in its U.S. adjustments and bullish in its foreign adjustments. Other fundamental cotton market influences this week included more rainfall across the Cotton Belt and a forecast of an early freeze in the Texas High Plains. The regular Thursday export report is delayed until Friday October 12.)
The Dec’18 contract settled flat on Thursday at 76.81 cents per pound. The Jul’19 contract settled the week at 79.03, while the distant Dec’19 settled Friday at 76.20 cents per pound. Chinese and world cotton prices were both mixed this week.
A sample of option premiums on ICE cotton futures saw changes from prior weeks due to declines in the the underlying futures. On Wednesday, October 10, a deep in-the-money 90 cent put option on Dec’18 cotton was worth 13.26 cents per pound (up from 9.05 cents four weeks prior). Similarly, an 85 put settled Thursday at 8.37 cents per pound while an 80 put settled at 3.90 cents per pound, both increasing in value over the past several of weeks. These values and their weekly change show how put options increase in value with falling futures prices, thus acting as down-side price insurance. An out-of-the-money 85 call on Jul’19 cotton was worth 2.55 cents per pound, down 2.82 cents from four weeks prior. Looking way out there, a near-the-money 75 put on Dec’19 cotton settled Thursday at 4.18 cents per pound.
This week provides another example of the ever present risk of unexpected market volatility. It can happen in both directions, as it did in Monday’s session. For example, a surprise resolution to U.S.-China trade relations, extensive damage from another hurricane, revising Indian stocks downward by USDA, or something else totally unexpected could trigger speculative buying. As always, the most relevant question is 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. Earlier hedges with puts or put spreads on Dec’18 futures should be evaluated with an eye towards exiting those positions this month. With the recent decline in the futures market, put strategies have been accruing value. Contracted 2018 bales could be combined with call options on the deferred futures contracts. Call option strategies have become increasingly affordable with the recent decline in the futures market. New crop put strategies to hedge the 2019 crop are a straightforward and relevant approach.
For further analysis and discussion of near term price behavior, click on the menu above 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” menu tab.
