From the View of the Merchant
May 18, 2009 What are your thoughts on the recent instability in the international cotton industry?
I’ve seen a lot of things, but I haven’t seen anything like I’ve seen in the past 12 months. It’s just been devastation. But at the same time, it’s not just the cotton industry that has seen a lot of these things; it’s been other industries, too. Many people ask the same question: “what’s going to happen?” Well, who knows? But at the end of the day, there is still going to be cotton growers, there are still going to be cotton merchants, and there are still going to be cotton mills. Now, what that industry will look like in 2 years, 5 years, 10 years, I have no idea. But there will be an industry. What we’ve all got to do is wait and see what structure comes out of this and adapt to that, whatever that is.
I think, from the merchants side we’ve obviously all seen a lot of changes. I don’t think that’s finished unfortunately. We are seeing a change in the cotton merchant community in the fact that the purely cotton companies, as opposed to the multi-commodity companies, are finding it more difficult to survive in this environment. In the normal course of business we can all compete, however when an abnormal event occurs, such as March of last year, it becomes clear that the resources required to overcome such events are more considerable than they have ever been. Therefore, what I believe we will see is a split between cotton companies backed by multi-commodity companies and cotton only companies. A lot of the middle ground will disappear as we have fewer traders.
How will merchants tackle the issues with the futures market?
We really do have some big problems with the futures market and the reliability of it as a risk management tool. The owners of that exchange don’t seem to care about the actual commodity; they only want the volume, and even that seems to be deserting them now. It is a big issue for the industry and clearly it is the source of a number of the problems that merchants have encountered over the past 12 months, and possibly the reason for a number of the casualties that we’ve seen. So it’s not an ideal risk management tool. I think the biggest challenge for all of us is to adapt our risk management by being conscious of the limitations now of the futures market.
How is that going to affect the way you do business?
I think clearly one of the big changes is going to be forward business. That’s obviously not so much an issue for U.S. cotton, but it certainly is for the likes of Australia and Brazil. Is a merchant going to be prepared to not buy two or three years forward? What does he do as a hedge? Because time clearly is a risk and the length of that time is a bigger risk.
What has been the effect on global supply and demand?
The government involvement in the cotton industry, in this past six months in particular, has just been huge. I can’t recall such a concerted government involvement in the international cotton industry. The Chinese buying their reserve stock, the Indians supporting the price, the Uzbeks restricting cotton onto the market…it’s just been an unbelievable marketing period. This has changed the supply and demand situation. But then you look at the market going to 40 cents, and the impact has been that we’ve been able to sell U.S. cotton in a period when, over the last few years, we haven’t been able to sell because of the pressure from, particularly, India. I think this reserve stock will come back into the market, but not in the next 12 months. It will be a slow release as, maybe, we will see a reduction in cotton production in China.
GET THE NEWSLETTER TODAY!
