Market Requires a New, or Improved, Exchange
February 22, 2012 Just think about what we have seen over the last year. We have lived a historical rollercoaster and believe me, it was not fun! The overheated market throughout much of 2010 turned into an inferno when the new crop came in, and grew even hotter when buyers and sellers came together at the Cotton Council International Sourcing Summit in November 2010. We witnessed oversold cotton, decreases in production, rumors that we will run out of cotton in July, desperate buyers on one hand, suppliers reluctant to sell on the other, and huge volumes of on-call sales for everyone, even buyers who had never done that before.
Then the rollercoaster plunged downhill: canceled contracts; defaults from farmers, ginners, merchants and even spinners; unpaid margins; wash-outs; and negative export sales numbers due to cancellations. Spinners had cotton worth more than their assets while traders had millions of dollars in contracts that were never fulfilled.
Today, every person in the supply chain is working to heal the wounds from last year. No one is happy because everyone lost money. The behavior of people in the business has changed and the favored strategy for buyers is now hand-to-mouth. No one wants risky long-term commitments.
Merchants are more cautious and are investigating more carefully when they buy and sell. At least one good thing happened last season: Australia rejoined the supply chain. Unfortunately, we lost some of the biggest and oldest merchants. The rumor is that more changes are coming.
Against the tremendous increase in cotton prices, retail prices increased only 1% to 2%. Not only did retailers resist passing their increased costs on to end consumers, they also changed their behavior, using more synthetic components.
Under normal circumstances, cotton is cheaper than viscose fiber, but not this year. Even now, they cost about the same. Another reason that mills prefer man-made fiber is because its price is not as volatile as cotton’s.
Time to Face Reality
It’s just being naïve to try to explain what happened this year only by looking at supply and demand. The most important factor is that other players are in the market – index/hedge/pension funds, investment banks, and what we call “specs” – people who have never seen a bale of cotton before.
The average spinner who consumes 15,000 to 20,000 tonnes, or a mid-size merchant who handles 1 million bales per year, is trying to survive on the same field with a non-market player backed by billions of dollars.
This is neither fair nor acceptable. Of course, we are trading in a global market, and yes, we need to look beyond supply and demand. We can’t isolate cotton from all external factors. But I think the Intercontinental Exchange goes beyond its aim and function and needs an update, if not a brand new incarnation.
We are already at the start of a new year. Right now, it looks as though we will spend much of it trying to make up for the past year.
Are we going to have enough cotton? It’s not very easy for a spinner to change his business or for a merchant to say, “I’m not going to sell cotton anymore.” Farmers can switch to another crop easily. So how can we prevent those things? With government regulations or subsidies? Spinners will face losses on their balance sheets, which will result in credit issues because they used most of their credit this year. Merchants are caught in the middle of this struggle and are trying to find a way out.
I hope we will leave all of these challenges behind us and look forward to a better and easier year.
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