Complexity Puts Emphasis on Risk Management
February 22, 2012 At Plexus, we are of the opinion that the cotton business as we have known it for most of our lifetimes has changed – and hopefully for the better. The raw cotton business has, in our view, been operating in a vacuum for years. There has been little interaction with the textile supply chain above the yarn manufacturer. Price discovery and risk transference also has been in that vacuum.
The advent of sustainability and traceability is positive for the raw cotton business because it engages everyone throughout the supply chain, from the retailer downwards, and ensures that all are aware of the raw cotton they consume and the processes involved. This will open up a completely different thought process over time and will be absolutely positive for the building of relationships and partnerships to ensure common goals are met throughout the textile industry.
The way we deal with price changes will have to change. Businesses built up over generations, employing vast numbers and providing stability and responsibility to the areas where they operate, can be destroyed as a result of the inability of proper price discovery and risk transference of raw cotton.
The events since March 2008 prove the current cotton futures market is no longer viable. We will push hard for a global contract that enables worldwide delivery of multiple growths and a structure that ensures no competitive advantage to anyone. Until that structure is in place, the cotton market should be managed in a more dynamic way than has been the case in the past.
The events of the last few years have done huge damage. Although cotton is by far the fiber of choice for consumers, it does not offer the certainty of man-made fiber (MMF) with its consistent quality, robotic delivery and fairly consistent price levels.
Textile companies are pushing MMFs even though they know there is nothing quite like cotton, and nanotechnology is still far away from producing a suitable equivalent. We need to deliver the consistency our customers require with delivery price and quality. Globally, all those who produce cotton should be responsible for its promotion. Perhaps a way can be found through the International Cotton Advisory Committee?
Because we know our industry and because we believe in partnership with our customers, we will seek to create and perpetuate an industry that is not afraid to push for these changes.
Due to the extremely volatile market environment we have been living under since 2008, there has been an increasing need for advanced risk management among customers. Today’s cotton market is a lot more complex than it was just a decade ago. The arrival of index fund investing, escalating debt bubbles with their implications on currencies and purchasing power, and higher energy prices due to “peak oil” are forcing us to take a much more encompassing view when it comes to managing risk.
In order to address this need, Plexus has decided to open a Risk Management Division, which will be headed by Peter Egli, head of Plexus risk management. The purpose of this new division is to advise a selected group of customers about how to manage their cotton exposure during these volatile times, including use of nearby cotton and options. We will provide market analysis and creative hedging strategies with the help of futures and options, as well as over-the-counter products. The goal is to create client partnerships that are a lot more comprehensive than the traditional customer/merchant relationships have been.
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