Cotton Market Update for the Week Ending Friday September 7, 2018

The week ending September 7 saw ICE cotton futures continuing to rise and fall in a fairly narrow range.  On Monday the Dec’18 contract traded down from 83 cents, then recovered, before sliding towards 81 cents early Friday.  Friday’s session then saw a sharp rally back over 83 cents, before retrenching. This week’s pattern of fluctuating open interest showed evidence of minor speculative selling (confirmed through at least Tuesday).  Other fundamental influences this week included so-so weekly export sales, a seasonally high level of export commitments,  and scattered rainfall across Texas, with Tropical Storm Gordon bringing more unwanted moisture to the eastern Cotton Belt.  Chinese and world cotton prices also fluctuated higher and lower this week.

The Dec’18 contract settled on Friday at 81.99 cents per pound.  The Jul’19 contract settled the week at 82.96, while the distant Dec’19 settled Friday at 77.73 cents per pound.

A sample of option premiums on ICE cotton futures saw minor changes from the previous week because of the narrow fluctuations and slightly lower weekly settlements of the underlying futures prices.  On Thursday, September 6, a deep in-the-money 90 cent put option on Dec’18 cotton was worth 9.26 cents per pound (a little higher than last week). Similarly, 85, 83, and 80 puts on Dec’18 settled Thursday at 5.07, 3.66, and 1.99 cents per pound, respectively.  These values still allow for an opportunity to hedge minimum cash prices above likely costs of production.  An out-of-the-money 85 call on Jul’19 cotton was worth 4.16 cents, while a further out 90 call cost 2.78 cents per pound.  Looking way out there, a near-the-money 77 put on Dec’19 cotton settled Thursday at 5.09 cents per pound.

The futures market remains supported above 81 cents — but that is no guarantee.  There are various things that could trigger downside price volatility.  One possibility might be an unexpectedly bearish September WASDE.  With the futures market trading only a few cents above the 200 day moving average, a sharp sell-off might have extra jet fuel from sell stop orders clustered around 79 cents.  On the other hand, a surprise resolution to U.S.-China trade relations, damaging late-season weather, or a bullish WASDE could increase speculative buying again.  I would not at all be surprised by one more good production surprise in the next month.  As always, the most relevant question 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.  Contracted 2018 bales could be 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.