For the week ending Friday, November 12, the nearby Dec’21 ICE cotton futures gyrated sideways before shooting up higher after Wednesday’s neutral WASDE report (see chart above courtesy of Barchart.com).  The balance of the week saw ICE futures glide back lower, with the Dec’21 settling at 117.69 cents per pound.  The level of ICE cotton futures open interest crept higher, but then stepped up on Wednesday with the price rally, perhaps reflecting some new long positioning.

CBOT corn and soybean futures, along with KC wheat, all trended higher this week.  The U.S. dollar index moved higher in a big S-curve pattern, gyrated sideways while stock indices were lower to mixed across the week.  Chinese cotton prices slipped back under $1.50 cents per pound, while world cotton prices were flat this week.

Cotton-specific fundamental factors this week included neutral supply/demand numbers from USDA, lower weekly U.S. cotton export sales, continuing good U.S. cotton condition ratings, and high volume index fund rolling. U.S. cotton certified stock levels continued to erode after peaking in late June.

The movement of ICE cotton futures has implications for potential hedging strategies.  The price volatility in 2021 is a reminder why it is risky to hedge by selling futures, and it’s also made some option premiums more expensive.  As  new crop Jul’22 cotton futures risen in the last few months, a near-the-money 85 call option has increased in value.  Between September 23 and November 11, an 85 call option on July’22 rose from 9.45 cents to 26.92 cents per pound.  Had it been purchased in the previous months (i.e., back when some new crop was being cash contracted in the mid-80s), the current uptrend clearly illustrates the insurance aspect of call options.  In general, a call option represents upside price risk protection, in combination with cash contracting or selling futures.  Looking further out, the rising new crop Dec’22 futures contract has resulted in an out-of-the-money 80 cent put option premium declining from fourteen cents in January to 3.68 cents per pound by November 11.  If Dec’22 futures keep rising, this and similar put options will become increasing affordable down-side price insurance.  That is, once purchased, it will buffer unexpected declines in Dec’22 futures by increasing in value.

For more details and data on Old Crop and New Crop fundamentals, plus other near term influences, follow these links (or the drop-down menus above) to those sub-pages.