The week ending Friday May 27 saw upward trending prices spearheaded by two big step ups on Tuesday and Thursday. Tuesday’s Jul’16 settlement exceeded its 200-day moving average, which may have added a little extra technical fuel. Jul’16 and Dec’16 settled on Friday at 64.28 and 63.85 cents per pound, respectively. World prices and Chinese futures prices were higher this week, continuing their recent up and down pattern. The association of high trade volume and rising open interest indicates some apparent new buying, some of which (on Tuesday) might be reflected in this week’s Commitment of Traders data. I am left wondering if perhaps the combination of Texas’ slow planting pace, the recent rains there, and/or later La Niña drought possibilities are leading some speculators to bet on prevented plantings and reduced supply. I wouldn’t go that far yet. Like last year, a whole lot can get planted in a short period of time. And nobody knows what the rainfall distribution will be this summer.
The other main cotton news included middle-of-the-road export sales, which is still following the expected demand pattern . Grain and oilseed futures trended higher this week, and oil futures notably traded over $50 per barrel. There were mixed U.S. economic indicators this week included mixed durable goods orders and positive new home sales (the latter specifically good for cotton). This new information may well have influenced stock and currency markets more than commodities.
The old crop futures spreads still imply no market value to cover the cost of storing cotton. This is a market signal for growers that it is not worth hanging on to old crop cotton in hopes of higher prices in this calendar year, other than for pure contingency purposes. Besides this so called “convenience yield” rationale, another caveat is that the loan program provides a limited storage credit for cotton in the loan when prices are low enough, which they are.) Nevertheless, there are other ways to seek higher prices for old crop cotton. This option contract is something that could be married to your harvest-time cash sales in a strategy commonly called a “storage hedge” for 2015 bales. The relevant question is: what is the likelihood that Jul’16 futures will rise at least to 66 cents (i.e., the strike price plus the sub-one-cent option premium)? Is such a price rally likely enough for you to insure against missing out on it? Would it cost less than storing your cotton to take advantage of an uncertain price rally later this year?
Regarding new crop, a 65:58 cent put spread on Dec’16 futures cost has been varying a lot with the fluctuations in the underlying futures contracts. The spread would protect against Dec’16 declining to 58 cents. However, it currently does not make sense to pay over three cents to protect against a similar sized downside risk, especially when the downside risk is already protected by the loan program. If Dec’16 ever rallies into the upper-60s, this spread might become more affordable and more rational.
For further analysis and discussion of near term price behavior, click on the menu above entitled “Near Term Influences”. Longer term price behavior is more influenced by fundamental supply and demand forces, which is discussed above under the “Market Fundamentals and Outlook” menu tab.
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