Cotton Marketing Planner
Department of Agricultural Economics, Texas A&M University
Cotton Market Update for the Week Ending Friday, May 10, 2019
The week ending Friday, May 10, 2019 saw ICE cotton futures decline sharply on Tuesday and again over Thursday-Friday in association with the Trump administration ratcheting up the U.S.:China trade war with higher tariffs on Chinese imports. This, plus neutral/bearish WASDE numbers from USDA for old crop cotton apparently outweighed the potentially bullish influence of a stronger export sales numbers. New crop fundamentals absorbed non-surprising new crop balance sheet numbers from USDA, and remained focused on the short terms costs (i.e., mixed planting pace) and long term effects of ample moisture across the Cotton Belt. The new crop situation is getting even more complicated by the possibility of West Texas irrigated cotton land being switched to corn, or prevented corn plantings in the Delta not drying out in time to get planted to cotton. This creates more than the usual uncertainty about planted acres and potential production.
After expanding 26,576 contracts in April, the net long hedge fund position shrank 5,833 contracts between April 23 and April 30 (i.e., like taking your foot off the gas pedal). Then over the next week (through Tuesday, May 7) it declined 12,853 contracts. The price weakness observed between May 9-10 suggests even more speculative selling.
On Friday Jul’19 and Dec’19 ICE cotton futures settled down 7.23 and 5.05 cents week-over-week, respectively, at 68.45 and 69.40 cents per pound. The distant Dec’20 settled at 68.85 cents per pound, down 3.01 cents week-over-week. Chinese cotton prices were mixed while world prices trended lower this week.
A sample of option premiums on ICE cotton futures saw big changes associated with the steep decline in the underlying futures. For example, with Thursday’s lower settlement of Dec’19 at 70.57 cents per pound, an in-the-money 75 put on Dec’19 cotton settled up two and a half cents, week-over-week at 6.53 cents per pound. An out-of-the-money 68 put traded for 2.45 cents per pound on Thursday, up from 1.17 cents per pound one week earlier. This price behavior in the short run illustrates how put options act as downside price insurance.
This week provides a ongoing example of unexpected market volatility. It can happen in both directions. For example, a resolution to U.S.-China trade relations, or confirmation of lower U.S. planted acreage, something else totally unexpected, coupled with notions of an oversold market, 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) 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 to the mid or upper 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 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.