Cotton Marketing Planner
Dr. John Robinson
Department of Agricultural Economics, Texas A&M University
Cotton Marketing Summary for the Week Ending Friday, July 16, 2021
For the week ending Friday, July 16, Dec’21 ICE cotton futures made a two and a half cent upward climb toward 90 cents, re-grouped on Thursday, and then made another run towards 90 cents on Friday (see chart above courtesy of Barchart.com). Friday saw an intraday high of 89.95 with the Dec’21 settling at 89.93 cents per pound.
Continuing influences include reportedly moderate-to-inactive physical trading, rising Chinese and rising world cotton prices, an up-trending U.S. dollar, and mid-week stock markets that peaked at new record highs. U.S. cotton certified stock levels continued to erode after peaking in late June. Cotton-specific fundamental factors this week included positive (to me) looking supply/demand numbers from USDA, good demand for the Chinese Reserve sales that began this week, very low, but seasonally normal U.S. export sales, and continued rains across the U.S. Cotton Belt (some more welcome than others). In Texas, continued rains have maintained a mixed bag situation for cotton, e.g., delayed fruiting in the northwest, delayed maturity along the Gulf Coast, creating fertility and weed control problems from wet fields, and putting a premium on having a lot of warm sunshine at the appropriate time.
Open interest in ICE cotton futures rose this week, while ICE cotton futures price settlements trended higher. This suggests new spec buying, at least through Wednesday. Indeed, the earlier Tuesday snapshot (through July 13) showed more long positioning in ICE cotton futures with 5,596 more hedge fund longs, week over week, outweighing 1,399 more hedge fund shorts. In addition, the same CFTC report also showed 1,451 more index fund longs, week over week.
The movement of ICE cotton futures has implications for potential hedging strategies. The price volatility in Q1 and Q2 is a reminder why it is risky to hedge by selling futures — but it’s also made some option premiums more expensive. As new crop Jul’22 cotton futures rose and fell in the last few months, a near-the-money 85 call option has increased and decreased, respectively, in value. On July 15, a near-the-money 85 call option on July’22 settled at 8.72 cents per pound. This is pretty expensive, reflecting a whole lot of time value between now and June, 2022. In general, a call option represents upside price risk protection, in combination with cash contracting or selling futures.
The rising Dec’21 contract has resulted in an out-of-the-money 75 cent put option premium declining from 4.45 cents (January 28) to 3.68 cents (February 4) to 2.79 (February 11) to 2.36 cents per pound on February 25. This option traded for 2.38 cents per pound on March 11, and then 5.29 cents per pound on March 25, with the underlying futures slipping below 80 cents. However, Dec’21 futures now over ten cents out-of-the-money, the 75 cent put was worth only 0.63 cents per pound on July 15.