Dollar analysis after the Fed meeting
27 September 2021
Economy, Eur-Usd, Copper
6 October 2021

Calendar spread on cotton (and some considerations)

As often happens to me, an email I received provided me with the topic I will discuss in this article. More precisely a calendar spread on cotton and some considerations on the momentum of commodities.

The calendar spread is CTZ21-CTN22, it is featured in my book on the best seasonal spreads for this year (a new edition for 2022-2023 will be released in December, updated and improved) and has a seasonal window that runs from mid-August/mid-September to November. Here is the chart with the two seasonal patterns at 5- and 15-year.

In the last week, the spread has had a strong bullish movement following the same strong movement had by the cotton futures. Being the spread constructed with the purchase of the closer delivery (that one more sensitive to the movements of the underlying) and the sale of that farther, if the trend of the cotton is bullish, almost certainly the price of the spread will rise.

To confirm the bearish seasonality, I show you the chart of the Seasonality by month.

CTZ21-CTN22 Seasonality by month (

As you can see in the last 5 years the month of October has ended with a decline; in the last 15, it has happened 12 times out of 15.

Now I evaluate the price level. First, I look at the Continuous histogram.

CTZ21-CTN22 Continuous histogram (

The chart gives me a couple of useful pieces of information. First, the spread is in backwardation (above zero) and over the last 20 years has spent 20.63% of the time in backwardation. However, the 25th-75th percentile range is all in contango. Another thing I notice is that in the past the spread has reached a much wider backwardation than it does now (so it is not certain that the spread will not continue to rise).

Another chart that gives me an interesting piece of information is the Seasonality stacked chart.

CTZ21-CTN22 Seasonality stacked (

The chart is not so much interesting for the level of the spread as for the fact that in the past, except in 2013, at this time of year it was already in contango (i.e., the price was in the negative). This confirms the price anomaly which, as mentioned, is due to the strong rise in the underlying.

The last chart I show you is about COT, the net position of Speculators.

Clearly, 80k represents a resistance level and a return below the net position could represent the start of Speculators' declining interest in cotton. However, in my experience, when there are strong bullish movements in a commodity, it is not at all uncommon to see a bearish price/net position divergence forming and with the latest COT report one may have started on cotton.

On a fundamental analysis level, in its September crop report, USDA estimated a 2021-22 U.S. crop of 18.51 million bales. Harvested area was an estimated 9.92 million acres, implying a non-harvested area of about 1.27 million acres. The resulting abandonment rate is about 11.34%. The national average yield per harvested acre was estimated to be about 895 pounds (32 pounds more than the five-year average). This raises the ending stocks to 3.70 million bales.

So, on an analytical level, a little bit of everything suggests a drop in cotton and the spread in the coming weeks. However, this is a very favourable period for commodities. Even though we are likely to see a strengthening of the US dollar, the strong inflation growth in the US that we are seeing and will also see in 2022 (beyond what the Fed ridiculously projected in its last Economic Projections in September) will be bullish fuel for a large part of commodities. So, it is very likely that we will see different seasonality (the bearish ones) that will not be respected.

I personally find it very difficult now, when I see strong bullish trends, to decide on a short entry, even on a spread and all my analysis agrees on a drop-in that commodity. Yesterday I only opened one short contract on the multi-leg natural gas spread (this is my analysis) when natural gas futures were gaining almost 10%. At the close, it seemed to take the right entry price but I am not very convinced.

We are increasingly seeing strong rallies in more and more commodities. Oats, natural gas, cotton... who will be the next to make a strong rise?

As often happens to me, an email I received provided me with the topic I will discuss in this article: a calendar spread on cotton and some considerations on the momentum of commodities

David Carli
David Carli
David is a financial analyst with over 29 years of experience (two years as a fund manager) in currencies and commodities. He collaborates with a major European commodity investment company and is the author of several successful books about trading and financial markets.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.