Cotton Market Update for the Week Ending Friday June 8, 2018
For the week ending June 8, ICE cotton futures slipped a few cents, as if to digest some of the previous week’s rally, only to take off again to contract high settlements on Thursday and intra-day contract highs on Friday. The accompanying pattern of open interestsuggested perhaps some profit taking early before the resumption of new/net buying over and above the fund rolling. The latter day rally in ICE futures representing a break from following the overnight CZCE cotton futures in China which were lower this week. World prices were mixed.
The nearby Jul’18 cotton contract settled Friday at 94.94 cents per pound. New crop Dec’18 settled Friday at 92.60 cents per pound, a quarter of a cent higher than the previous week’s close, but 19 points lower than Thursday’s contract high settlement. A sample of option prices on ICE cotton futures saw changes from the previous week because of changes in the underlying futures price. On Friday, June 8, a near-the-money 90 strike put option on Dec’18 cotton cost only 4.59 cents per pound. Out-of-the-money 85, 83, and 80 puts on Dec’18 cost only 2.37, 1.73, and 1.03 cents per pound, respectively. These values highlight the continuing opportunity to hedge minimum cash prices above projected costs of production.
Fundamental influences this week included Chinese announcements playing down the implication of supply shortages and highlighting the possibility of expanded import quota at the favored 1% tariff. This week also saw the release of an industry forecast of China returning to the good ol’ days of importing 10 to 15 bales per year. Closer to home, the U.S.Cotton Belt saw scattered rainfall and a lot of heat in the south central region. With West Texas growers passing crop insurance planting deadlines, there is an increasing possibility of high abandonment of dryland plantings. (It should be added that this is fairly common. Half of the time over the last dozen years, we have seen in Texas at least one in three planted cotton acres not being harvested.)
This market remains supported by continued long speculative positioning and other demand indicators, e.g., high U.S. export commitments and remaining potential mill fixations on Jul’18 futures. There is some risk if these hedge fund longs get spooked by some unforeseen risk-off event. The April 4 Chinese tariff proposal is an example of such an event, although its effect was brief. Nobody ultimately knows how high these markets could go, especially new crop Dec’18. The only thing you can know for sure is whether a forward 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 consider taking advantage of present (or future) 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. In hindsight, contracted 2017 bales could have been combined with call options on the deferred futures contracts. New crop put spread strategies to hedge the 2018 crop are a straightforward and relevant approach. Competitive bale and acre forward cash contract opportunities in West Texas were available earlier in the Spring, but the ongoing drought conditions and price volatility have put a damper on that. So grower hedging may be the main tactic to take advantage of the present opportunity.