As of this writing (Feb. 14), old crop ICE cotton futures maintain their incredible uptrend, now aimed at 90 cents. A mix of bullish factors include: 1) tightening ending stocks per USDA’s February WASDE report; 2) the possibility of more trimming of USDA’s 2020 production forecast; 3) continuing strength in export demand as reflected by very high export commitments and decent current weekly sales; 4) continued long positioning by hedge and index funds; and 5) the eventual need for commercial hedgers to buy back short futures positions with potentially few available/willing to sell to them.
I can’t see much of anything that would make prices retreat. Neither can any other cotton market analyst that I’m following. So, we’re all on the same side of the boat, which should alarm everybody. So what should you do? Well, it seems obvious, but if you have old crop bales to sell, you might consider selling them. Just because the echo chamber is 100% bullish doesn’t mean some new information or some unforeseen black swan event won’t come along and trigger a correction.
So what else should you do? Well, these old crop dynamics will pull up on new crop futures prices, as if the latter needed any help. The fundamental picture for the 2021 is tight on its own right: fewer acres and dry conditions could give us only a 15- to 16-million-bale crop, plus only carrying in four million. A 20-million-bale supply less the likely 18 million bale of U.S. total use could result in a very tight two-million-bale ending stocks outcome. Statistically, such an outcome is associated with the Dec’21 contract trading in the 80s in the Fall.
But a statistical price forecast is like a weather forecast (ok, maybe worse). At any rate, there is always uncertainty. Because of that uncertainty, we always want a marketing plan to reduce downside risk while allowing for upside potential. Dollar cost averaging with forward cash sales over time is one way. Selling futures is another way (also scary in a rising market). Combining futures hedging with call options, or just buying put options will reduce some of the financial risk and provide upside price flexibility – at a cost. Similarly, fixing cash prices and buying call options can achieve downside protection while purchasing the upside potential.
Doing nothing all season is also a strategy. It avoids up-front option premiums and possible futures margin calls. But the cost of this strategy is bearing the risk of lower prices all season. In that sense doing nothing is the ultimate form of speculation.
We can make educated guesses about where prices are headed. But it is always ultimately an uncertain outlook. The only thing you know with certainty is what the market is telling you today. If today’s prices pencil out to a profitable cash position, consider the several choices you have for fixing the downside and benefiting from continued upside.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.