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Cotton
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- Price
developments
- The futures market and contracts
- E-commerce
Differences in cotton prices may be attributable to a number of factors. Cotton prices vary, in particular, depending on the variety grown and the quality of the harvested cotton. For examples, ad hoc quotations are set for long-staple Egyptian cotton.
In addition, cotton-pricing mechanisms are affected by government support programmes, especially in the United States. Subsidisation regimes in several producing countries have added to the relative fragmentation of price formation for cotton. According to a communication from the Commission of the European Communities to the Council and the European Parliament (COM(2004) 87), due to subsidisation, prices paid to domestic cotton farmers were 90% and 154% above world prices in 2001/02 in the US and EU respectively.
It should be pointed out here that there is no world futures contract currently used as an international cotton price benchmark. Indeed, standard specifications of futures contracts traded on the New York Commodity Exchange correspond mainly to US cotton market fundamentals. For the same reason, quotations at the Osaka Mercantile Exchange are not representative of world prices for raw cotton. Despite a punctual reduction of basis risk due to the increasing importance of US cotton on the world sector (and on price discovery mechanism), the use of futures instruments for the other origins (with the exception of Mexico, member of Alena and which might be in a position to use US futures markets as both prices are well correlated) is not always easy as spot and futures prices might suddenly diverge. Any exogenous changes (e.g. trade policy) might eventually bring on the re-emergence of an important basis risk, with devastating spillovers on cotton hedgers.
The point of departure is generally the cash price for
cotton set in actual transactions or through relatively short-term contracts
for forward delivery (2 to 4 months). World prices are monitored by
means of price indexes (the "Cotlook Indexes", A and B) compiled
by Cotlook Limited, a private UK cotton consultancy, and published daily
in the Cotton Outlook.
The Indexes are intended to be representative of the price level on
the international raw cotton market:
- The Cotlook A-Index is the average of the cheapest five quotations
from a selection of the main upland cottons traded internationally (19
origins*). The prices are CIF cash against documents on arrival of a
vessel at a Far East port**.
- The Cotlook B-Index is an average of the cheapest three quotations
for "Coarse Count" cotton - commonly in use for spinning coarse
count yarn over the nine origins *** shipped to European ports.
Overall, fluctuations in cotton prices are determined by several factors, in particular: shifts in the level of demand and supply, which reflect changes in producing countries' cotton policies.
* Memphis/East, California/Arizona, Orleans/Texas,
Tanzania, Turkey, India, Uzbekistan, Paraguay, Pakistan, Côte
d'Ivoire, Burkina Faso, Benin, Mali, Greece, Australia, Mexico, Syria,
Brazil, China.
** Including Bangkok, Laemchabang, Jakarta, Hong Kong, Penang, Kelang,
Singapore, Busan, principal Japanese and Chinese ports, Manila, Tainan,
Keelung, Semarang, Surabaya.
*** Orleans/Texas, Argentina, Brazil, Turkey, Syria, Uzbekistan, China,
Pakistan, India.
Long-term price developments for cotton (Cotlook
A-Index, 1973/74-2004/05)
and world cotton stocks
Source: UNCTAD secretariat (Data: UNCTAD Commodity Price Bulletin)
With output exceeding demand, world cotton
stocks rose steadily in the middle of the 1980s, up to 10.3 million
tonnes in 1985 and 11.4 million tonnes in 1986. There have then been
continued increases in cotton stocks during the late 1990s and early
2000s, with stocks remaining high above 10 million tonnes. The rise
in cotton stocks is attributable to excess supply, notably in China
and the United States, were government incentives stimulated oversupply
and added to the general downward pressure on prices. Cotlook A Indexes
declined consistently during this period, with prices falling at 35
US cents/lb in August 1986. Prices stood at 59.8 US cents/lb on average
in 1985 and 48 US cents/lb in 1986, compared to 80.9 US cents/lb in
1984 and 74.7 US cents/lb in 1987 respectively. Following a meagre upward
movement in 1987 (74.7 US cents/lb) and 1990 (82.6 US cents/lb), the
A-Index dropped again in the early 1990s, with major downward shifts
occurring in 1992 and 1993. Prices averaged 57.9 US cents/lb in 1992-1993.
The lowest peak was recorded in November 1992 (52.7 US cents/lb). Several
factors contributed to drive cotton prices down, including:
1) A rise in cotton production. World cotton production increased from
19 million tonnes in the 1990/91 season to 20.7 million tonnes in 1991/92,
at a growth rate of 9% over the period. Production sharply increased
mainly due to the huge increase of China, whose production rose from
3.8 million tonnes in 1989/90 to 5.7 million tonnes in 1991/92.
2) On the demand side of the ledger, pricing was negatively impacted
as cotton consumption declined in the former Soviet Union (consumption
levels, which stood at 2 million tonnes in 1990, fell to 1.9 million
tonnes over the next year and to 1.8 million tonnes in 1992).
Prices performance was more robust in the following years, with prices reaching the highest peak at 120 US cents/lb in 1995. This upward movement was recorded in conjunction with a steady decrease in cotton production in a number of countries (whose supply levels were closely linked to cotton quotations). In the first half of the 1990s, production of raw cotton dropped sharply in South America (it divided by 1.5), as the cotton area reduced in size. However, this regional slowdown in production was compensated by huge increases in the largest producing countries, notably China and the United States.
With one fourth of global output, one fourth of cotton stocks, and approximately 30% of world consumption, China plays a major role in cotton, affecting the movements in prices.
Parallel movements in cotton prices (Cotlook A-Index, US cents/lb) and net exports from China
Source: UNCTAD secretariat (Data: International Cotton Advisory Committee - ICAC)
For an example of national price discovery mechanism, please refer to the Oxfam/Cirad/IER Ecofil case study in Mali ""L’Impact sur l’Economie Malienne du Nouveau Mécanisme de Fixation du Prix du Coton Graine", August 2005.
The futures market and contracts
Futures contracts and options traded in the United States and Japan are hereafter detailed. Contract specifications may be subject to change. Please, verify information with the specified sources.
United States:
Futures contracts and options are traded on the New York Board of Trade.
Cotton No. 2 Futures Contract
| Trading
Unit 50,000 lbs. net weight (approximately 100 bales). Trading Hours |
Daily Price Limits |
| Price
Quotation Cents and hundredths of a cent per pound Trading Months Ticker Symbol |
Position Limits Basis Grade |
| Minimum
Fluctuation 1/100 of a cent (one "point") per pound below 95 cents per pound. 5/100 of a cent (or five "points") per pound at prices of 95 cents per pound or higher.* N.B.: Spreads may always trade and be quoted in one point increments, regardless of price levels. |
Point Value |
|
Delivery Points |
|
|
Last Trading Day First Notice Day |
Source: New-York Board of Trade
Options Contract on Cotton No. 2 Futures
|
Trading Unit Trading Hours Price Quotation |
Daily Price Limits Strike Price Increments Minimum Price Fluctuation Point Value |
|
Trading Months Ticker Symbol Minimum Fluctuation |
Position Limits |
|
Last Trading Day |
|
|
Expiration Date/Time |
Source: New-York Board of Trade
Japan:
In Japan futures contracts are traded at the Osaka Mercantile Exchange but they concerns cotton yarn.
Cotton Yarn 20'S and 40'S
| Commodity | Cotton Yarn of 20 and 40 count of single gray, waving, "Kingyo" branded by Toyobo |
| Trading Hours | Morning Session 9:50 10:50 Afternoon Session 13:50 14:50 In any sessions, count 20 is traded first, then followed by count 40. |
| Trading Method | Open outcry floor trading with 4/5 sessions per day, fixing a single contract price for each contract month in each session. |
| Contract/Delivery Unit | 6,000 lbs. or 2,721.54 kg per unit for Cotton Yarn
20 4,000 lbs. or 1,814.36kg per unit for Cotton Yarn 40 |
| Price Quotation | Japanese yen per lb or 0.45359 kg ex. Warehouse in Osaka and Hyogo |
| Tick Value | 0.1 yen per lb or 0.45359 kg |
| Contract Months | Current contract month and next five months |
| Last Trading Day | The 4th business day prior to the last business day of the month. |
| Delivery | Any positions remaining in the current contract month as of the expiry are to be settled with the delivery of physical cotton yarn 20 or 40 designated by the Exchange on the last business day of the month. |
Source: Osaka Mercantile Exchange
Futures contracts on cotton fibers have recently been developed in China, India and Brazil. This is the case under the ZCE ("Zhengzhou Commodity Exchange") which launched in June 2004 it contract N°1 on cotton with 5988 contracts traded in 2004 and around 50,000 contracts traded mid-2005. Similarly, NCDEX ("National Commodity and Derivatives Exchange") introduced a futures contract in December 2004 while the contract traded on ("Brazilian Mercantile and Futures Exchange") is also seen as a relevant domestic benchmark.
Dealcotton.com (UK)
Theseam.com:
Internet-based marketplace for the buying and selling of cotton and
cotton by-products, promoted by, among others:
- Allenberg Cotton Co. (Louis Dreyfus Corporation),
- Dunavant,
- Hohenberg (Cargill),
- Plains Cotton Cooperative.
