CFTC Cotton On Call

The federal Commodity Futures Trading Commission (CFTC) publishes a report showing the quantity of cotton that has been bought or sold where the sales price has not yet been fixed.  This type of contracting is normally for basis contracts, which are also referred to as “on call” contracts. Textile mills routinely buy cotton from merchants using “on call” contracts. When these parties enter in to the “on call” contract, a futures contract would normally be sold to hedge the transaction. Later, when the mill actually fixes the price, that short futures position would be bought back. This could be done with options or futures. To the extent that mills don’t independently cover their options positions, their un-priced “on call” contracts are reflected in the current “on call” sales report, under “Unfixed Call Sales”, which is reported by individual futures contract.

When the unfixed call sales (to mills) outweighs the unfixed call purchases (by suppliers) the implication is that there will potentially be a lot of futures buying as mills hit the deadline of their “on call” contracts, fix the price, and the associated short hedges are bought back.  We have seen this before in the last few years, e.g., during June of 2013.  There was a lot of thinking that on call buying would support or lift cotton prices during 2014 and 2017, but the historically large discrepancies between unfixed call sales and purchases appeared to resolve themselves without explosive rallies.  Perhaps this was because the reported sales were not true biz to biz sales, e.g., they were consignment sales within big merchant shippers.  A similarly large discrepancy in 2016 appeared to have some influence on upward price volatility, but also eventually resolved itself quietly.

For what it is worth, as of January 5, 2018, the Spring ’18 contracts (Mar, May, Jul) have a combined discrepancy of roughly eleven unfixed call sales for every unfixed call purchase.  Individually it actually breaks down to 7:1 on Mar’18, 26:1 on May’18, and 14:1 on the Jul’18.   This industry newsletter describes the process and rational for how this discrepancy has accumulated during 2017.  For the time being, the discrepancy represents a massive short position that probably sucks the oxygen out of any attempts to sell the market lower.  And as this persists into 2018, that could be a source of upside price volatility as those old crop contracts mature.