By Gregory Meyer in New York
The US stands to lose its crown as king of world cotton pricing as negotiations over a world futures contract for the commodity take on new urgency. A world contract if agreed would overturn a decades-old system of allowing only cotton grown in the US to settle benchmark futures used by farmers, merchants and money managers around the globe.
Traders blame a lack of deliverable supplies for price swings that recently stung companies such as Glencore. Industry groups have revived talks in the past month aimed at an alternative: boosting supplies by adding reliable exporters such as Australia and Brazil to the list of eligible cotton origins and potentially making bales deliverable at ports in south-east Asia.
Futures are contracts that require delivery of a commodity by a certain date. Most futures are liquidated beforehand but a small amount of deliveries establish a firm link between financial contracts and the physical markets they track. Expiring futures have surged in the past two years as merchants scrambled to find domestic bales that met the standards of Intercontinental Exchange’s New York futures market.
US farmers grew 14 per cent of the global crop in 2012. That share may shrink further as US farmers plan to plant 27 per cent fewer acres with cotton this spring in a shift to high-priced soyabeans and corn, the National Cotton Council estimates. “These things create discussion about a world contract,” said Bill May, chief executive of the
American Cotton Shippers Association. “Who knows what cotton acreage is going to be in the US when you continue to have grain prices where they are today?”
In January, shippers reconvened a committee dedicated to a world futures contract for the first time since talks stalled last summer, Mr May said. Its board, which includes top international merchants such as Cargill, Noble and Louis Dreyfus Commodities’ Allenberg Cotton, also addressed it at a meeting late last month.
Meanwhile, a new taskforce of the Liverpool-based International Cotton Association “unanimously agreed that the trade needed a world cotton contract” at its first meetingonJanuary28,ICAsaid. However, the question of whether to set futures prices at the point of origin, such as Australia, or destinations such as Asia, generated “strong opinions,” minutes of the meeting showed. An origin contract prevailed in an 8-7 vote.
The ICE exchange said: “We have been, and continue to be, in discussions with market participants on an international contract, but no decisions have been made.” Separately, a rule filing disclosed that cotton and other commodities traders on the ICE trading floor will move to NYSE Euronext’s nearby New York Stock Exchange floor this year. ICE is completing a $8.2bn takeover of NYSE but said its lease for the space was not contingent on the deal. © The Financial Times Limited 2013 (Source: Financial Express)