Cotton Marketing Planner
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Friday, October 18, 2019
The week ending Friday, October 18 saw Dec’19 ICE cotton futures slide on Monday to a low of 61.72 before reversing into a four day gradual climb to the week’s highs above 75 cents per pound on Friday (see chart above, courtesy of Barchart.com). The weakness on Monday may have reflected disappointment with the previously announced partial trade deal between the U.S. and China. Nevertheless, that and perhaps bullish crop developments appeared to stimulate short covering and outright long positioning by speculators, in relatively high volume. Short covering was evident earlier in the week. Other fundamental news this week included a tolerable well export sales report and continued slippage in cotton crop condition ratings. News of a Brexit deal was associated with a more general bullish “risk off” reaction in financial markets, and a weaker U.S. dollar, both of which may have boosted commodities.
As of Thursday, October 17, the Dec’19 and Jul’20 ICE cotton futures contracts settled at 64.99 and 66.13 cents per pound. A sampling of old crop options reflects the recent uptick 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 4.83 cents per pound on October 17. Likewise, a deep in-the-money 75 put option on Dec’19 lost more value, settling on October 17 at 10.10 cents per pound (down from 14.82 cents three weeks ago).
Chinese and world cotton prices were mixed/higher this week.
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.