Cotton Marketing Planner
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Friday, November 1, 2019
The week ending Friday, November 1 saw Dec’19 ICE cotton futures gyrate sideways, trading a half cent above/below 65 cents early and then expanding to a 64-66 cent range in the latter part of the week (see above, courtesy of Barchart.com). In terms of fundamental news, weaker export sales appeared to be more influential than the small slippage in cotton crop condition ratings and harvest delays. Chile cancelled the mid-November summit that was to be the venue for possible progress in U.S.-China trade negotiations. To the extent that this summit was a positive influence on cotton prices earlier in the week, it had faded by week’s end.
As expected, the recent support in ICE futures coincides with another large reduction in hedge fund shorts between October 15-22, which remained stable through October 29.
As of Thursday, October 31, the Dec’19 and Jul’20 ICE cotton futures contracts settled at 64.44 and 67.64 cents per pound. The more distant Dec’20 future settled at 67.53 cents per pound. A sampling of old crop options reflects the recent stability in old crop futures. For example, an out-of-the-money 65 cent Jul’20 call option that traded for 3.15 cents per pound on September 26 was worth 5.38 cents per pound on October 31. Likewise, a deep in-the-money 75 put option on Dec’19 has recently lost value, settling on October 31 at 10.60 cents per pound (down from 14.82 cents four weeks ago). A similarly deep in-the-money 75 put option on Dec’20 (scroll down for discussion) cost 9.4 cents per pound. Chinese cotton prices trended higher this week, while world prices were mixed.
These last several months provide a ongoing example of market volatility. It can happen in both directions. For example, as new crop supplies being to flood in later this fall, there will be fundamental pressure on prices. On the other hand, detailed confirmation of a resolution to U.S.-China trade relations, or an unexpected downshift in yield expectations, or something else totally unexpected could trigger more short covering. 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 in the mid/upper 60s, including 3) merchants who have already contracted and will probably do some more needed hedge selling, just like they did on October 3, and bearish old crop fundamentals will likely take prices lower eventually.
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 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.