Managing Price Risk
February 25, 2009 Price risk has increased substantially for cotton industry participants since the U.S. market became mainly dependent on export demand. The main objective in risk management is establishing a price level with flexibility of benefiting from favorable price moves. The 15-cent price rally in December ’08 futures from May to October came as a result of fewer foreign stocks, as well as the expected decrease in the 9.7 million bale U.S. glut last season.
Price moves in the U.S. will be tied to changes in foreign production, supplies, demand for American cotton, and world trade policies. The result provides a market environment for a possible $100 per bale or more price change in December ’08 futures.
New genetic technology is pushing yields up worldwide. Production in India has more than doubled since 2002, and crops in China and Brazil show a 50% and 75% increase, respectively. It appears that the potential exists for foreign production to keep pace with growth in use.
While 2007/08 U.S. planted acreage decreasing 4.2 million acres, foreign acreage increased by 1 million.
However, the smaller U.S. crop and expected recovery in export demand will sharply decrease stocks carried over into the 2008/09 season.
A shortage of U.S. cotton could develop in 2008/09 if U.S. growers plant less than 10 million acres. That would be about 1 million, or 10% less than in 2007/08. For the market to slow the shift in cotton acres to grain next year, December ’08 futures might need to exceed 80 cents per pound before planting decisions are made. Thus, for your 2008/09 marketing plan, early next year may be a good time for growers to fix a floor on cotton price.
Clearly, the amount of cotton needed by foreign countries is vague. Also, the ongoing developments in farm and trade policies create sudden price changes that can not be anticipated.
The resulting price risk creates a massive amount of necessary hedging of price risk by growers, merchants and textile manufacturers. The economic impact of the major international changes in the cotton business forces participants to seek the most cost effective methods of operation.
The result is a more efficient, concentrated and competitive U.S. cotton industry. The outcome is increased coordination within market channels and greater reliance on electronic trading.
Long-Term Cotton Price Promising
Price risk has increased substantially for cotton industry participants since the U.S. market became mainly dependent on export demand. The main objective in risk management is establishing a price level with flexibility of benefiting from favorable price moves. The 15-cent price rally in December ’08 futures from May to October came as a result of fewer foreign stocks, as well as the expected decrease in the 9.7 million bale U.S. glut last season.
Price moves in the U.S. will be tied to changes in foreign production, supplies, demand for American cotton, and world trade policies. The result provides a market environment for a possible $100 per bale or more price change in December ’08 futures.
New genetic technology is pushing yields up worldwide. Production in India has more than doubled since 2002, and crops in China and Brazil show a 50% and 75% increase, respectively. It appears that the potential exists for foreign production to keep pace with growth in use.
While 2007/08 U.S. planted acreage decreasing 4.2 million acres, foreign acreage increased by 1 million. However, the smaller U.S. crop and expected recovery in export demand will sharply decrease stocks carried over into the 2008/09 season.
A shortage of U.S. cotton could develop in 2008/09 if U.S. growers plant less than 10 million acres. That would be about 1 million, or 10% less than in 2007/08. For the market to slow the shift in cotton acres to grain next year, December ’08 futures might need to exceed 80 cents per pound before planting decisions are made. Thus, for your 2008/09 marketing plan, early next year may be a good time for growers to fix a floor on cotton price.
Clearly, the amount of cotton needed by foreign countries is vague. Also, the ongoing developments in farm and trade policies create sudden price changes that can not be anticipated.
The resulting price risk creates a massive amount of necessary hedging of price risk by growers, merchants and textile manufacturers. The economic impact of the major international changes in the cotton business forces participants to seek the most cost effective methods of operation.
The result is a more efficient, concentrated and competitive U.S. cotton industry. The outcome is increased coordination within market channels and greater reliance on electronic trading.
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