U.S. Cotton Presents a Unified Front to the World
February 9, 2011 In 1931, John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent.” Nearly 80 years later, thanks to the ghosts of 2008, many of us are once again pondering our own “Inner Keynsian.”
However, the current environment is different from the one in 2008, with unbridled demand and strong physical prices for raw cotton (as opposed to abject speculation) driving the futures markets to price levels none of us has ever seen. In truth, this market has behaved somewhat rationally during this most recent price discovery process, only getting sloppy at the tail end of this major move upward. While progress is being made on certain fronts with the Intercontinental Exchange (The ICE), The National Cotton Council (NCC) and others, there is still plenty for the American Cotton Shippers Association (ACSA) to work on, especially in terms of buy-side and sell-side contract sanctity.
Based on the content of an ICE-commissioned Informa study on the delivery point structure for the cotton contract, the ICE appointed a special committee made up of international merchants and cooperatives to study said report and recommend any action that the committee deemed necessary to improve the cotton contract.
As a result of the findings of the committee, I–along with Woods Eastland from Staplcotn and Tom Farley from ICE–testified in front of the Commodity Futures Trading Commission in support of making a fundamental change to the cotton contract by replacing New Orleans with Dallas/Fort Worth as a delivery point. This change will be realized with the December 2013 contract. Texas will produce almost 10 percent of the world’s cotton this year, so it’s time for this change.
We are also examining daily price limits and how the futures and options market has handled the dramatic changes in prices this year. No common ground has been established, but I think this evidence is emblematic of an increased ability of the ICE and the trade to work together, and that bodes well for future cooperation between the two groups as we work to improve the cotton contract.
ACSA was also able to take a big step forward with the development of an ACSA membership into the NCC. All ACSA members will now be members of the NCC, which will benefit not only from a dues increase, but more importantly, by receiving supportive input directly from the merchandising community. This move was vital because the NCC needs to be able to illustrate to Washington that it represents the entire industry as we approach the 2012 Farm Bill and the ramifications of Brazil’s World Trade Organization case against the U.S. cotton program.
Continued market volatility only amplifies the need for harmonization of trade rules. All cotton should be sold under International Cotton Association (ICA) Rules, including the approximately 3.5 million bales of U.S. cotton sold to domestic mills. The Southern Mill rules are a fantastic piece of work that have served an industry for generations, but too many firms–selling too much cotton, under too many sets of rules–not only creates confusion for buyers, but also increases counter-party risk. Bringing the U.S. industry in will help alleviate that issue and lend credibility to the quality of ICA rules.
This year, the market has more than doubled in price. Non-performance on the buy side takes on new and unprecedented risk in this environment, no matter where you are buying cotton. Merchants need to know and be familiar with the rules under which they are purchasing cotton.
Meanwhile, all Memphis, Eastern and Texas cotton should trade under Memphis Cotton Exchange Rules. ACSA should not be in the business of arbitration; the Memphis Cotton Exchange should be. Having fewer rules, but a better understanding of those rules, will lower counter-party risk and help to prevent contract defaults.
Cotton has a compelling history and a very bright future, and we have to work together not just to ensure cotton’s future but also our own place in that future.
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