Rose on Cotton: Moving Toward a Dollar – Think Option Pits

Photo: Nick McMichen

The ICE Dec contract experienced some weakness through Wednesday of this week before finding its legs to post new contract highs on both Thursday and Friday. Dec would up posting a 24 point weekly gain, although it flirted with the 95.00 level on Friday. The old crop/new crop strengthened noticeably to 234 points.  

Dec’s recent 1000+ point run has prompted many to reminisce about the 2010/11 marketing year and the cotton market’s historic ascension to more than $2.30/lb. However, there are key differences between the current situation and the one that transpired around 7 years ago. First, domestic and aggregate world ending stocks were projected (USDA) at 1.6M and 41.55M bales, respectively within the April, 2011 WASDE report. This compares with the USDA’s 2018/19 currently projected 5.2M and 83.75M bales for US and world ending stocks.


On the demand side, US export sales have slowed with the recent surge in ICE futures while shipments have exploded.

Total net sales against 2017/18 for the week ending May 31 were near unchanged Vs the previous sales period at approximately 20K running bales while shipments were a MY high (and nearly unbelievable) at nearly 590K running bales. Shipments continue to eclipse the weekly pace required in order to match the USDA’s 15.5M bale export target, and we expect that the USDA will significantly enhance its 2017/18 export estimate next week within the June WASDE report. Total sales against 2018/19 were lower at around 121K running bales; sales against 2018/19 currently stand at a running total of nearly 4.8M 480lb bales.

U.S. Production

With respect to domestic production, it is still hot and dry across West Texas while the balance of US producing regions are reporting mostly satisfactory progress with respect to the new crop. Most of the crop within the Mississippi River Delta is beautiful.

Cotton – Midsouth – Plant Bugs Moving, Bollworms Stage Big, Early Flight – AgFax   6-7

Cotton – Southeast – Wrapping Up Planting, Hints Of More Doublecropping – AgFax   6-7

Cotton – Southwest – Rain Helps; Residuals Working – AgFax   6-6

Internationally, reserve sales in China slowed somewhat this week, which is likely largely due to the banning of traders from purchasing stocks. Too, this year’s auction season will be extended one month, at least, and will now run through the end of Sept. Elsewhere, Pakistan has reinstated duties and sales taxes on raw cotton imports while droughty conditions persist across northern India and Pakistan. Further, there are recent reports out of Uzbekistan that dry and cool conditions early this season have done some damage to the nation’s 2018 crop.


The Dec contract continues to reward producers with unsold cotton, although many producers are running out of estimated production to contract. As we wrote last week, forward contracting past 75% of estimated production in early June is a risky game, and we continue to steer producers to the option pits to take advantage of continuing moves towards a dollar without outrunning their actual yields. While volatility has made an at the money option strategy an expensive proposition, your broker can walk you through a variety of spread tactics to reduce the necessary investment.


The USDA will release its June WASDE report on Tue, June 12 at noon, ET. Bloomberg’s monthly survey of analysts and traders shows an expectation for lower world and US production and ending stocks and lower world consumption to be put forth in the upcoming report Vs figures proffered in May.  

More on Cotton

The expected reduction in projected domestic production is only around 400K bales, while we think it could be much closer to 750K. Given that the USDA is bound to use this year’s prospective plantings figures in order to derive their projection of domestic production, any revision will have to be based on adjustments to expected yield and abandonment figures.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, with the market having moved further into overbought territory. Index funds will continue to roll out of long July positions next week. Still, it is the WASDE report and the weekly export report (both scheduled for release on Thursday) that will likely drive trading action next week. We think that the WASDE report could feature bullish figures while it seems unlikely that the export report will.

Have a great weekend!

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