World Cotton Contract In Development Could Provide New Market Option

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As long as anyone can remember, the world cotton market has revolved around the No. 2 cotton contract managed by the IntercontinentalExchange (ICE).

But as the cotton industry has evolved into a global market, that old standard contract – which is limited to U.S. grown cotton and delivery points – doesn’t always meet the needs of countries producing or trading other growths of cotton. In fact, it may not always be an ideal fit for U.S. cotton moving in the export market.

To that end, a new World Cotton Contract is currently being developed by ICE, following intensive and cooperative work by the American Cotton Shippers Association (ACSA) and the International Cotton Association (ICA). The new contract will be designed to work alongside and be complimentary with the current No. 2 contract. The No. 2 contract will maintain its current focus, while the new world contract will provide expanded growths of cotton from around the world and several new delivery points.

ICE hopes to launch the new offering in the fourth quarter of 2014, with the first listed contract month sometime in 2015.

“Discussions about the possibility of forming a world cotton contract that would work alongside the current No. 2 contract began at our 2011 annual meeting,” said Bill May, ACSA president. “A committee was formed to discuss the possibilities of formulating a contract that would include not just U.S. cotton, but also other growths of cotton from around the world to be delivered at different points.”

Initial progress was slow, recalled May. There was little consensus on how the potential contract would work, and there was concern that it may not provide the volume or liquidity needed to be useful and successful. In 2012, the committee tried again and developed more specifics in terms of contract months, settlements, daily price limits, origins and delivery points.

Selected origins included growths from the U.S., Australia, Brazil, India, the Ivory Coast, Benin, Mali, Burkina Faso and Cameroon, with delivery points identified in the U.S., Australia and Malaysia. All of those recommendations are an integral part of the contract currently under development by ICE.

Yet, while the ACSA committee was busy formulating their plans, an ICA task force was also working to develop a similar contract.

“We felt if any contract was going to be successful, we needed to get together with the folks in Liverpool and try to combine their ideas and thoughts with ours to develop one contract,” said May. “Two contracts would have served no purpose and would have hurt the chances for a world contract being successful.”

The ACSA and ICA committees were combined and worked together to develop the final contract specifications. Last November, the joint committee met with representatives from ICE about moving ahead and hosting the contract.

ICE will not discuss terms, conditions and other contract details until they are finalized. But, in essence, the addition of a World Cotton Contract provides the best of both worlds to the global cotton industry. The supports and proven success of the current No. 2 contract will still be in place, side by side with a new option that the gives the market the ability to choose which works best for them.

“ICE wanted to make sure that the trade was going to be supportive before they did the work to get this contract up and going,” added May. “Now it’s just a matter of waiting to see how people will participate with it.”

Jim Steadman is Field and Online Editor for Cotton Grower magazine. He has spent more than 35 years in agricultural writing and marketing.
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