Cotton Market Update for the Week Ending Friday September 28, 2018

The week ending September 28 started off in a up and down gyrating pattern, except that Wednesday’s downward gyration just kept on going. The lower price settlements and declining open interest was consistent with some moderate long liquidation, which was not totally reflected in the CFTC’s Tuesday snapshot.  Other fundamental cotton market influences this week included reportedly light demand in major U.S. markets, continued weak export sales, a remaining seasonally high level of export commitments,  and unhelpful rainfall along the Gulf Coast and Atlantic Seaboard.  Chinese and world cotton prices followed a similar flat/downward pattern as did ICE futures.

The Dec’18 contract settled on Friday at 76.37 cents per pound.  The Jul’19 contract settled the week at 78.94, while the distant Dec’19 settled Friday at 75.77 cents per pound.

A sample of option premiums on ICE cotton futures saw changes from the previous week due to the decline in the the underlying futures.  On Thursday, September 27, a deep in-the-money 90 cent put option on Dec’18 cotton was worth 12.39 cents per pound (up from 9.05 cents two weeks prior). Similarly, an 85 put settled Thursday at 7.60 cents per pound (+2.73 cents from two weeks ago) while an 80 put settled at 3.41 cents per pound (+1.57 cents in two weeks).  These values and their weekly change show how put options increase in value with falling futures prices, thus acting as down-side price insurance.  An out-of-the-money 85 call on Jul’19 cotton was worth 2.71 cents per pound, down 1.66 cents from two weeks prior.  Looking way out there, a near-the-money 75 put on Dec’19 cotton settled Thursday at 4.28 cents per pound.

This week provides another example of the ever present risk of unexpected market volatility.  It can happen in both directions.  For example, a surprise resolution to U.S.-China trade relations, extensive damage from another hurricane, revising Indian stocks downward by USDA, or something else totally unexpected could trigger speculative buying.  As always, the most relevant question is whether a cash contract or a hedge ontoday’s futures price will be a profitable, or at least survivable, price floor.

Given all these uncertainties, growers should always be poised and ready to take advantage of 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.   Earlier hedges with puts or put spreads on Dec’18 futures should be evaluated with an eye towards exiting those positions in the next month or so.  Contracted 2018 bales could be combined with call options on the deferred futures contracts.  New crop put strategies to hedge the 2019 crop are a straightforward and relevant approach.