NY cotton futures continue impressive climb

10 Jul '07

3 min read

Technically the market points upward, but it has also become much overbought. Yet, in a bull market, overbought conditions often represent little more than a hic-up before the uptrend continues. Large speculative funds have been the impetus behind the move along with the key fundamental element that the 2007 crop will be much less than expected just two months ago. The funds will press the market higher.

Additionally, the path to higher prices has also been led by the December 2008 contract, closing at 70 cents this week. As I suggested several weeks ago, cotton would have to bid for 2008 acreage in light of the more competitive grain and oilseed prices. The December 2008 contract must rise to at least 74 cents plus to keep 2008 U.S. plantings from falling below 10.0 million acres. Such a trading level suggests that the December 2007 contract should rise to the 67-72 cent range.

Growers are encouraged to look at using put options to lock in a floor price rather than the outright futures hedge. However, I will not discourage you from using the straight hedge. My alternative is to buy one 62 cent put and sell two 73 cent calls (or 74 cent calls) to defray the cost of the put. Your downside will be 62 cents less the net premium paid and your upside will be 73 (or 74) cents minus the cost of the premium.

O. A. Cleveland

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