Cotton Market Update for the Week Ending October 20, 2017

For the week ending October 20, the most active Dec’17 cotton slid on Monday, partially recovered on Tuesday, and spent the rest of the week in a gradual decline to the weekly lows.  Fundamental news this week included a recovery in  export sales compared to the previous several weeks, reflecting recent demand export support above 66 cents.  Dec’17 ICE cotton futures settled the week at 68.88 cents per pound, which is 26 points higher than where it settled the previous week.  This also represents a reversal of the former inversion over Dec’18 cotton, which settled Friday at 67.76 cents per pound.   A sample of option prices on ICE cotton futures saw relatively small changes from the previous week.  On Thursday October 19, an in-the-money 73 put option on Dec’17 was worth 5.69 cents per pound, while a 73:66 put spread was worth 5.15 cents.  Out-of-the-money 73 call options on Jul’18 ICE futures were worth 2.26 cents per pound on Thursday;  a further out-of-the-money 79 call on Jul’18 traded for 1.04 cents.  Looking ahead to next year’s crop, a near-the-money 67 put option on Dec’18 cotton cost 3.96 cents per pound on Thursday, while an out-of-the-money 60 put on Dec’18 cost 1.38 cents.   Chinese and world cotton prices were mixed this week.

With the post-Hurricane Harvey rally, we may have seen the last opportunity for ICE futures trading over 70 cents for a while.  Remaining upside volatility might come from the production possibilities as a West Texas crop heavy laden with bolls races to finish before cold weather shuts it down.  On the other hand, there is a risk within six months to see futures under 60 cents.  But since that is all uncertain, growers should remain poised and ready to take advantage of unexpected rallies, and protect themselves from sudden sell-offs. Forward contracting, immediate post-harvest contracting, and/or various options strategies can be used to limit downside risk while retaining upside potential.  In particular, contracted bales could also be  combined with call options on the deferred futures contracts.  It is also not too early to be evaluating the worth of put spread strategies to hedge the 2018 crop, or hedge the insurance base price.  Hedgers still with put or put spread positions on Dec’17 need an exit plan wince the remaining time value will erode exponentially in October.