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Cotton market not focussed on cotton fundamentals

04 Mar '08
4 min read

Certificated stocks are climbing and now total near 580,000 bales with about 40,000 additional bales under review. This signals that the best market for US cotton, at current prices, is for delivery against the New York futures contract--not for actual consumption.

More importantly, the subtle meaning is that the delivery process is not following economic theory. Additional evidence of economic imperfections in the New York futures contact has been the failure of cash and futures prices to converge during the delivery period. Spot cotton traded for as much as 1400 points off the New York nearby March contract this week-and March futures are in their delivery period.

Thus cotton growers, holding physical cotton, have gained only a very small share of the recent price increase. Too, US merchants have been unable to make any appreciable export sales as prices have run away from textile bids. More importantly, with respect to economic problems with the New York contract; merchants, in this period of advancing prices, have been unable to effect an effective hedge for cotton they have purchased (or have considered purchasing) from the grower.

I remain a proponent of selling December 2008 call options at the one dollar ($1.00) or better strike level. The risk is that the New York December contract will rise to the dollar level. The worst scenario then would have pricing your cotton for one dollar plus the premium collected from selling the call option. One dollar--not bad!!!

Price volatility will remain the order of the day, as well as the tendency for the market to follow the grain and oilseed complex. Additionally, the advance in all commodity prices finds support, unfortunately, from the absolute collapse of the value of the US dollar over the past six years. The economic hole dug by the US government is very deep and is only serving to exacerbate the global energy and food crisis.

O. A. Cleveland

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