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 future instruments for the other origins (with the exception of Mexico, member of NAFTA and which might be in a position to use US futures 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:
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,
Long-term price developments for cotton (Cotlook
UNCTAD Secretariat from UNCTAD and ICAC statistics
With output exceeding demand, world cotton
stocks rose steadily in the middle of the 1980s, up to 10.3 million
tonnes in 1984/85 and 11.4 million tonnes, the following year. 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 Index declined consistently during this period, with prices falling
at 35US cents/lb in August 1986. Prices stood at 48.9 US cents/lb on
average in 1985/86 and 62 US cents/lb in 1986/87, compared to 69.1 US
cents/lb in 1984/85 and 72.2 US cents/lb in 1987/88 respectively. Following
a meagre upward movement in 1989/90 (82.2 US cents/lb), the A-Index
dropped again in the early 1990s, with major downward shifts occurring
in 1991/92 and 1992/93. Prices averaged 57.6 US cents/lb in 1992/93.
The lowest peak was recorded in November 1992 (52.7 US cents/lb). Several
factors contributed to drive cotton prices down, including:
Prices performance was more robust in the following years, with prices reaching the highest peak at 92.4 US cents/lb in 1994/95. 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 which has been going on until early 2000s (to which added an increase in cotton area in Brazil, Turkey and Australia). This overcompensation along with only a slight increase in demand and an important rise in direct subsidies (particularly at the end of the 1990s) led the price to reduce by more than half between 1994/95 (92,4 US cents/lb) and 2001/02 (41,9 US cents/lb). In 2007/08, cotton prices have reached pretty high level prices, especially from January to May 2008 when cotton prices averaged 75.6 US cents/lb. According to ICAC, this increase may not been totally explained by the analysis of market fundamentals and especially the significant decrease in the stock-to-mill use ratio forecasted at 53% in 2007/08 against 58% the crop season before.
With one fourth of global output, cotton stocks, and 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 "LImpact sur lEconomie Malienne du Nouveau Mécanisme de Fixation du Prix du Coton Graine", August 2005.
Futures contracts and options traded in the United States are hereafter detailed. Contract specifications may be subject to change. Please, verify information with the specified sources.
In the United States, Futures contracts and options are traded on the Intercontinental Exchange.
Cotton No. 2 Futures Contract (on January 7th, 2009)
Source: Intercontinental Exchange (ICE)
Options Contract on Cotton No. 2 Futures (on January 7th, 2009)
Source: Intercontinental Exchange (ICE)
Futures contracts on cotton fibers have also been developed in China, India and Brazil.
The Zhengzhou Commodity Exchange (ZCE) launched its Cotton#1 Contract in June 2004. The contract proved very successful the first year and a half of existence, exceeding at times volumes of cotton traded in New York. It nevertheless declined in 2006 due among others to the introduction of a new sugar futures contract.
Comparison between the number of contracts traded over the Zhengzhou Commodity Exchange and the Intercontinental Exchange (in '000 contracts)
Similarly, National Commodity and Derivatives Exchange (NCDEX) introduced three future contracts on cotton (Indian 28mm Cotton, Indian 31mm Cotton, Medium Staple Cotton) and one on cotton byproducts (cottonseed oilcake). NCDEX is the largest commodity exchange in India with about 1000 members (see list) who can trade electronically at 550 exchange centers across India. The major functions of this market is to serve as a trading platform and price discovery tool.
Specifications in regard to the various contracts available
for trading over the NCDEX may be consulted through the following links:
The Multi Commodity Exchange (MCX) is another indian electronic platform but smaller than NCDEX. The exchange offers 3 futures contract on ginned cotton fibers (long, medium and short), one on cotton yarn and one on "kapas" (an unginned cotton or the white fibrous substance covering the seed obtained from the cotton plant).
With the rapid spread of Internet technology worlwide, a number of companies were started in 2000 in an effort to design, develop and launch multiple internet-based platforms for business-to-business trade in cotton fiber and textiles. You will find hereunder some examples: