Cotton Market Update for the Week Ending Friday April 13, 2018

The week ending April 13 saw nearby ICE cotton futures stair-step higher by mid-week.  An attempt to take another step up was reversed on Friday back to the mid-week levels.  Fundamental news this week included neutral WASDE numbers, lower export sales, and continued strong export shipments.  The lower export sales were in part due to the cancellation of over 100,000 bales of previous sales to Pakistani mills.

May’18 cotton on the ICE settled on Friday April 13 at 83.41 cents per pound.  The Jul’18 contract settled 6 points lower at 83.35.  This inverted futures spread obviously does not justify storing cotton, e.g., Jul’18 would need to exceed May’18 by at least 150 points to cover the cost of carry.  There remains no market signal to store 2017 bales in hopes of higher prices, except for contingency purposes (what an egghead economist would call “convenience yield”). Both  old crop contracts remained inverted above Dec’18 which settled at 78.91 cents per pound on Friday.  Chinese futures and the A-index of world prices were mostly higher this week.

A sample of option prices on ICE cotton futures saw some changes from the previous week because of changes in the underlying futures.  On Thursday, April 12, in-the-money 73 call options on Jul’18 ICE futures were worth 10.26 cents per pound, while near-the-money 79 calls on Jul’18 were worth 5.33 cents.  A near-the-money 75 put option on Dec’18 cotton cost 2.69 cents per pound while  a deeply out-of-the-money 65 put on Dec’18 cost 0.43 cents on Thursday.

This market remains supported by long speculative positioning and continued evidence of good demand, e.g., the strong pace of U.S. export commitments and remaining potential mill fixations.  But there is also a risk to see futures weaken if the remaining hedge fund longs get spooked by some risk-off event.  The April 4 Chinese tariff proposal is an example of such an event. Even after accounting for some likely upward revisions to 2017/18 U.S. exports, the longer term fundamental picture painted by USDA still implies price weakness by virtue of a large year-over-year increase in 2017/18 ending stocks.  The same is true of the 2018/19 outlook.

Nobody ultimately knows how high these markets could go, including 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.  Since Februry I have heard of bale and acre forward cash contracts being offered in West Texas on competitive sounding terms, e.g., 2.5 cents and 3.5 cents off Dec’18, respectively, for international base quality.   Taking advantage of the present opportunity for selling or hedging at these levels was a main topic of conversation on the April 11 Ag Marketing Network conference call.