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UNCTAD explains Cotton as a natural fiber, which is of vegetable origin. It is made up of cellulose and is formed by twisted, ribbon-like shaped fibers. Cotton grows from a shrubby plant known as the "cotton plant". The cotton plant, is classified in genus Gossypium, and is of Malvacae family, which is made up of approximately 1,500 species. The plant, grows up to 10 meters high in the wild, but has been domesticated to extend to about 1 to 2 meters under commercial cultivation in order to increase easier picking. The cotton flower has five large petals, which fall leaving cotton bolls having a distinct and hard outermost layer. The cotton bolls open on maturing, the seeds and a lot of white and creamy and fuzzy fibres are revealed .(www.unctad.org) South Carolina cotton museum staff wrote a book; history of cotton they explain that the evidence found in earliest human records shows that cotton was grown from ancient times in Central Africa. Historians believe that cotton was carried from that section to Asia. Earliest records of both Egyptians and ancient Asians show that people cultivated and used cotton. The Egyptians wore cotton clothing well before 1000BC, certain Egyptian priests for their robes. The Greek historian and geographer Herodotus wrote of the cotton plant growing in central India in 450BC.in the new world Columbus found cotton growing abundantly during his explorations of the Caribbean in 1492. Cortez found cotton growing in Mexico in 1519 and stuffed his men's coats with the fiber to protect against arrows of hostile natives. There was cultivated cotton as early as 1522 and in addition, to wearing cotton clothing, they use the cloth to cover their dead. In North America ,cotton was first cultivated in 1621. In 1670 Joseph West cultivated the first cotton in South Carolina at the first permanent English settlement in Charles town.(2005 hence we see that cotton cultivation is not a new phenomena but has been there from ages ago.
There are different types of cotton as explained Singha (2010) Egyptian cotton which is a excellent, glistening cotton and has long thinner fibers. Sea Island cotton is expensive and one of the finest cottons its often mixed with silk. Pima cotton has long and smooth fibers and in the category of Extra Long Staple (ELS) types of cotton. Similar to the Egyptian cotton in terms of quality, it is a powerful, soft, and is a durable material. Asiatic Cotton commonly found in India, China and near Eastern regions. It has coarse fibers. American Upland cotton is of a basic quality and is used to make some fabrics. The cotton is of an extremely versatile nature. Canton cotton is heavy nature, soft and strong. Another type of cotton is the French Terry cotton type. It is heavy cotton, much heavier than cotton twill, but slightly lighter than Canton cotton. It is a soft cotton type with a short nap. Organic Cotton is a type that is harder than the usual cottons and is not easily available in usual retail shops. Organic cotton is minus any types of chemicals and pesticides that are generally used in the production of other types of cottons. Bamboo Cotton this type of cotton is uncommonly soft and is half organic. The crushed bamboo mixture, along with the organic cotton, is used to manufacture the fabrics and clothing. Like Organic cotton, Bamboo cotton is an all-natural and chemical free material.
Cotton commodity can be also substituted by a fiber known as the hemp. Anything that is made from cotton can also be made from hemp. Hemp has long fibers, which makes it create a finished product, that is more strong and durable than the one produced from cotton. Hemp can be cultivated instead of trees, and can also be grown instead of cotton, with environmental benefits. Since Cotton is one of the agricultural crops that is environmentally destructive through spraying pesticides; whereby, in US alone, 125 million kilograms pesticide is used annually. Globally, cotton production used 50 percent of the world's pesticides. Pesticides are dangerous threatening to contaminate the environment because they are often permanent and they bio-accumulate. Hemp grows tall and thick, shading, and alsoÂ mulching the soil and this contribuesÂ to givingÂ microbial a healthyÂ life. Hemp also grows in a variety of climates. Hemp needs moderate amount water on the other hand cotton requires large amounts of water. Hemp has eight times the stretching strength cotton and its much more durable than cotton. Hemp is more absorbent than cotton and therefore takes dyes better. (http://www.binhaitimes.com)
Discussion production areas
According to Bolt (2007) The largest producers of cotton, by 2009, were China with 34 million bales and India, with 24 million bales annually; most of the cotton produced was used up by their own textile industries respectively. United States is the biggest exporter of raw cotton and has an average sales of $4.9 billion, and Africa, follows with average sales of $2.1 billion. Boltsays 25,000 cotton growers in the United States are subsidized at the rate of $2 billion per year. Other countries that produce cotton are Pakistan, Brazil, Turkey, Greece, Syria, Egypt, Turkmenistan, Zimbabwe,Coted'Ivoire,Sudan, Argentina ,Cameroon, Nigeria, Spain, Iran, Paraguay, Togo ,Chad and Mexico
Cotton is mainly grown in the dry tropical and subtropical climates at temperatures between 11Â°C and 25Â°C.since It is a warm climate crop which is destroyed by heat or freezing temperatures of below 5Â°C and above 25Â°, although the resistance varies from one species to another much Exposure to dryness or wetness in some stages of development of the plant may be a threat to cotton quality and yields. Cotton can be comfortably cultivated in areas with rainfall of 850-1100mm. The cotton plant is Very sensitive to water logging. Rains during boll bursting period spoil the quality of cotton. The cotton plant is extremely sensitive to low temperature especially during floral bud, temperatures of 21 degree C and above is desirable during this time. During flowering and fruiting, temperatures of 26-32 degree C are required during the daytime, but at night cold temperatures are necessary. During maturation of bolls and fibers, which is essentially the drying stage, relatively high temperatures are required with an average daily temperature of 22 degree C. For optimal development and high quality of the fibers, hot and clear days are required. High light intensities all through the growing period are indispensable for a satisfactory vegetative development, for less shedding of buds and bolls hence resulting to higher yields. Reduced light intensities decrease the rate of boll-set causing excessive vegetative development.increased In shedding which is mostly observed after rains which occurs at the cotton's growing period can be associated more with the decrease in light intensity than to the impacts of rainfall. The seeds must be planted in moist soil which has high nutrient supplying capacity. (www.ikisan.com).
Discussion-Technology and genetic advances
According to the United Nations conference on trade report there are Important developments that have occurred in the crucial sections in cotton biotechnology and also breedingÂ particularlyÂ the genetically modified (GM) cotton.This is a gene that is resistant to glyphosate which is an active ingredient in herbicides was changed into cotton in 1987 for the first time. Another achievement of cotton was in 1989, when Monsanto came up with the "Bt cotton" variety.Its consists of a foreign gene got from bacillus thuringiensisa, which prevents plants from bollworm.The crop was first cultivated in 1996 on a commercial level in Australia and the USA. From then, cotton crop varieties have been grown by genetic engineering particularly the Monsanto's.Genetically modified cotton takes up to 50% of land used up for cultivation in Mexico and South Africa, in comparison to USA and China.In 2005 Argentina, Australia, India, and Indonesia also consented to commercial planting of genetically engineered cotton.
in reference to estimations made by CropLife International, cotton ranks third as theÂ largest genetically modified commodity worldwide, after soybeans and corn, with a market of around 430 million US dollars in 2002-2003.(www.unctad)
The USA is the world's main exporter whereby USA produced more than a third of total global exports in 2009, then India and Uzbekistan follows. In alignment with the fallin production in the USA, the ICAC expects that the country's exports will go down by 17% in the year 2010.African countries in the west and central have been the bigger participants in international trade in cotton since the early 1990s, but the region's place is threatened by new countries who have joined the trade.
According to some analysts, India may soonÂ become the major competitor of African cotton. The agricultural policy in favor of cotton and the accessibility of Chinese and south-east Asian markets are significant advantages for Indian cotton. Cotton exports in India tripled between 2005 and 2008 which indicates that India has the power to catch new markets. However, the decline in exports in 2009 showed that production is not stable whereby exports declined by 1million tones between 2008 and 2009. Brazil is also investing heavily in cotton,in 2009 Brazil's exports were more than those of West and Central Africa.(UNCTAD secretariat, based on International Cotton Advisory Committee (ICAC) statistics)
Cotton remains to be the most valuable natural fiber of the 20th century. In development set up, cotton is particularly crucial for its economic gain which is mainly in the production and processing of cotton. Much of the growth of cotton production was seen since the end of the Second World War was due to improved yield. According to the International Cotton Advisory Committee - ICAC), the development of the cultivated area mainly occurred at the end of the 1940s and have almost remained unchanged from then.
In 2007, 90 countries were growing cotton. In 2006/07, the main producing countries were China, India, pakistan and USA which accounted for almost three quarters of world output. When Uzbekistan and Brazil were added, the six countries account for 83% of world cotton production. The concentration in production of cotton, appears to rise for several years, has to be strategized by putttung into consideration the effect of policy reforms in the countries especially in the largest cotton producing countries, and also climatic and sanitary eventuality. Global output increased by 30% between 1983/84 and 1984/85, going up to 19.2 million tones up from 14.5 million tones. China led in growth , wherebyÂ the rise in production was pushed by measures taken by the Government on incentives.
On the consumption level, from the early of the 1940s, global cotton consumption has risen at an annual growth rate of around 2% .Demand for cotton was higher in the 1950s and 1980s, with a growth rate of 4.6% in a year in the 1950s and 3% in 1980s. Developing countries have taken much of global cotton output from the end of second world war. Their percentage in world consumption has become more significant since 2000s. Developing countries have accounted for 78% of world cotton use from 1981 to 1999; since yearÂ 2000 the ratio has exceeded 80%; Basing on projections based on ICAC figures, in 2010 alone they will absorb almost 94% of world cotton output. Cotton consumption has moved to developing countries mainly as as a result of rising wage levels in developed countries. In the textile industry labor in production is equivalent to about a sixth of the production cost. It implies that rise in labor costs washed away the competitive side of developed countries, and brought about the shifting of cotton processing to low-cost economies. Due to the specialization, some countries were able to adopt new methods of comparative gain out of competitive differences in the quality.The dynamism of the textile sector,became the foundation stone of the development of these countries.The main cotton producing countries also take up the larger part in consumption.Basing on the ICAC information, the United States, India, china and Pakistan all accounted for more than 55% of world cotton consumption between 1980 to 2008. (UNCTAD secretariat, based on International Cotton Advisory Committee (ICAC) Statistics)
Discussion-marketing and processing channels.
Cotton processing is a complex activity that starts by the cotton being harvested from the fields. The cotton seeds and fibers are then placed in a machine known as a cotton gin. This machine separates the cotton fibers from seedpods and seeds. The fiber is then taken to be turned into cloth in a a cotton mill. The waste products of this process are also used whereby the cotton seeds and pods are turned into food for cattle or are made into cottonseed oil. The remaing lint is used in paper making. At the cotton mill the raw cotton fiber is usually light brown in color. In order make it white, it is bleached using hydrogen peroxide. This powerful bleachisthenrinsed out with water from the cotton fibers in order to prevent any reaction with the dyes used later to color the cotton. 40 liters of water per kg of fabric is used.The cotton fiber is then spun and made into fabric.Many types of fabric can be got from cotton by use of techniques such asÂ mixing, pre-shrinking,dying weaving and mixing.(http://hubpages.com/hub/Cotton-Processing)
On marketing of cotton;marketing of the produce is equally beneficial to a farmer as the efforts to produce more by efficient use of the resources.hence Marketing, takes a extraordinarily crucial place in the scheme of things relating to any commodity, because it is the process by which the commodity acquires its monetisedvalue.Cotton is one of the most valuable commercial crops that takes significant place in the agro-industrial economy of the world.Cotton markets in different countries may be broadly classified into primary markets, secondary or wholesale markets, and terminal markets.Taking an example of India,Beforecotton lint reaches the ultimate consumer, namely the textile mill, it moves from the farm to primary market, from primary to the secondary market and from secondary to the terminal market.The secondary markets are wholesale daily markets where both assembling and distribution take place.These are mostly situated in the principal trading centres and market towns. These are the markets where ccottonproducts are sold to textile mills, exporters and traders dealing directly with the consumers or engaged in inter-State trade. In some cases, some of these markets combine the function of more than one type of market and cotton need not pass through the primary or secondary markets or in few cases through both.The markets are also known by other names, such as 'Mill Markets' or 'Spinners Markets'. Coimbatore is one of the central terminal markets in India. Cotton products move todifferent channels from producer to the consumer. The more common channels are:
1. Producer - Village Merchant - Commission Agent - Ginner - Consumer (Spinners)
2. Producer - Regulated Market - Ginners - Consumers
3. Producer - Regulated Market - Cotton Corporation of India - Ginners - Consumers
4. Producer - Co-operative Marketing Societies - Ginners - Consumers.
Discussion-major market participants
Top cotton producing countries in 2009/10 ( according to USDAdata in 480-lb bales) are China with 33.0 million bales, India with 25.0 million bales,United States with 13.25 million bales,Pakistan with 9.20 million bales,Central Asia with 6.56 million bales,Brazil with 5.50 million bales,which makes them the foremost cotton market participants in the world.(http://www.reuters.com)
The leadingfive exporters of cotton in 2009 were the United States, India,Uzbekistan, ( Brazil, and Pakistan. The largest nonproducing importers are Korea, Russia, Taiwan, Japan, and Hong Kong.
Balance sheet for worlds supply and demand for year 2009/10
WORLD SUPPLY & DEMAND
Beginning stocks 60.62 46.6
production 101.36 116.68
imports 36.19 38.08
Mill use 117.74 120.77
exports 35.54 38.08
Ending stocks 46.69 44.66
Stocks-to-use-ratio 39.7% 37%
In USDA's report for october , world cottonÂ production for the period of 2009/10 was approximated to be 101.4 million bales.World mill usage was at 117.7 million bales.and hence , world ending stocks are estimated to be 46.7 million bales with a stocks-to-use ratio of 39.7%.World production is estimated at 116.7 million bales for the 2010/11 crop year. Mill use is set at 120.8 million bales. With beginning stocks of 46.7 million bales, this would result in world ending stocks of 44.7 million bales on July 31, 2011, and a stocks-to-use ratio of 37.0%.(USDA Oct 2010 world production report)
The relationship between cotton supply and cotton prices is explained Â by using the stocks-to-use ratioÂ which is the totalÂ amount of cotton stocks remaining after a given year of cropping.then divided by the total value of cotton used in thatÂ particular year. As stocks are drawn , the stocks-to-use ratio goes down , and prices go up. on the other hand , when stocks go up , the stocks-to-use ratio goes up, and prices to decline . In the period ofÂ 2009/10,approximatelyÂ 13.0 million bales of stocks, summing up to 24.4% of ending stocks,created the difference between the value of cotton produced and the amount used.(http://www.bharatbook.com/Market-Research-Reports/World-Cotton-Trends-in-Demand-and-Supply.html.)
Factors affecting supply and demand
Leading producer countries, representing about 90% of world cotton production, expe-rienced a reduction in 2007-08 season's output. The worst declines are expected to be seen in the North America with (-33%) and Central and South America with (-24,%).there are different reasons for the downward trend in each country, Reasons for the lower supply especially from Brazil are the increased costs of production and high returns from corn whichÂ needs little fertilizer compared to cotton and alsoÂ does not require anyÂ fertilizer after one year when planted . ,an acute drought in southern Brazil from mid-November until January resulted in substantial lower production of the crops during the season season.
Global cotton area reduced to 30.75 million hectares in 2008 in comparison to 32.94 million hectares 2007 season. Approximately 75% of the world cotton area is in five countriesÂ which are India,China USA, Pakistan and Uzbekistan. Eventually The long-term pattern in USA cotton production has substantially changed after a heavy harvest of cotton in season 2005-06.
Declining local demand, reduced subsidies and more peopleÂ going for biofuel crops ended in more declining cotton production.Weak consumer demand as a result of reduction in economic activity in 2001 also caused world cotton consumption to fall that season. Improved technology, and the development of cotton production into new areas contributed to the increase in the world cotton supply in 2001.
Nevertheless , government policies that protect cotton gowers in various countries from flactuations in market costs results to increases in productivity in those countries, despite declines in market prices, also contribute to the imbalance of global cotton supply and demand. In written reports to governments, the Secretariat has pointed out around eight countries that ara accountable for nearly half of world cotton construction that provide direct income or price support subsidies to producers in their countries.Remedies for the declines in cotton prices have to address the sources of variation between supply and demand. Cotton industries are working to develop the market for cotton, and market conditions are leading to a reduction in supply.
Low cotton prices reduce the supply of cotton the following year , especially in those countries that do not give government measures. Nevertheless, despite improvements in demand and a reduction in area supply, an imbalance in the world cotton market is continues, and cotton prices are expected to remain a bit below the long run average in the next number of years. Government policies that shield some producers and alsoÂ encouraged production of cotton in some countries has prolonged the duration of below-average international prices.http://www.fao.org/docrep/006/y4344e/y4344e0c.htm
the tightening of world cotton supplies relative to demand is leading to increase in cotton prices.. In response to low cotton prices in recent years, farmers globally reduced their cotton acreage and shifted to crops that had more competitive prices. As world cotton acreage declined, world cotton production declined. Production in the 2009/10 crop year is 15.3% lower than in 2004/05.on the other hand, the demand for cotton has been comparatively stable. Even with the effect of the decline in cotton use the 10.8% decrease from 2007/08 to 2008/09Â usage was beyond production in all of thelastÂ past three crop years. Cotton bales have comprised difference in the the value of cotton produced and the value used . As theÂ stocks drawdown, cotton prices tend to increase.
To act on price pressures resulting from the the supply-demand imbalance that is currently seen , the administrationÂ bodies ofÂ various crucial cotton-producing and textile-manufacturing countries have taken measures to stabilize their native cotton markets. As tight as cotton supplies are universal, they are tighter in China, the world's largest cotton producer and consumer. In response to declined cotton prices in 2008/09, farmers in China decidedÂ toÂ reduce the cotton acreage 12.3% in 2009/10.adverse Conditions in the weather during the growing season aaffected Chinese production, which fell 11.4% in 2009/10. In the meantime , as the world started to come out from depression, increasing demand led to the growth of Chinese cotton usage byÂ 8.0%. Further complicatingÂ Â the supply situation is China quota system import, whichÂ restricts cotton fiber imports.To deal with the import restriction on cotton fiber, China raised its fibre imports.
Pakistan is the largest supplier of cotton wool to China. China demandÂ for cotton yarn raisedÂ yarn prices in Pakistan to great levels. In order to protect domestic textile and manufacturers from the high prices, Pakistan brought in aÂ strategy known as the cap on monthly cotton exports in 2010. The cap was later replaced with tax of 15% .India is also affected by the supply situation in China, its first customer for cotton fiber exports. India was largely absent from the world trade in the period ofÂ 2008/09, because its government-provided very little support .The prices were raised than world prices. India went back to cotton fiber export in 2009/10; however,having its own supply-demand imbalance, the government decided to suspendÂ cotton fiber exports in April.(china National Textile and Apparel Coucil)
Discussion of commodity prices is in terms of futures prices, whereby the buyer pays for a specified quantity of the commodity for delivery at a later, predetermined date., However,rarelydoes a futures investor actually get the item in question, instead sells it to some other buyer upon the contract's expiration. Futures trading reduces the risk for producers of commodities -for example a farmer, who risks the cost of producing agricultural products without knowing the price they will receive on the market when they are ready. In that case, futures contracts indemnify the farmer that will be paid for the commodity when it is ready for delivery.
Cotton futures contracts rallied 68 dollars or 102.02 percent during the last 12 months. From 1970 until 2010 Cotton futures prices averaged 62.48 dollars reaching an historical high of 134.18 dollars in November of 2010 and a record low of 25.33 dollars in November of 1970. Cotton No. 2 futures areÂ normally delivered in the months ofÂ March, May, July, October, and December every year.
The following is a table with Cotton No. 2 futures delivery dates and resultant tickers for 2009.
Delivery Month Full Ticker Symbol Thomson-Reuters Symbol
March, 2009 CTH9 CT/H9-CT
May, 2009 CTK9 CT/K9-CT
July, 2009 CTN9 CT/N9-CT
October, 2009 CTV9 CT/V9-CT
December, 2009 CTZ9 CT/Z9-CT
Deliverable Grades,Quality: Strict Low Middling, Staple Length: 1 2/32nd inc.
Trading HoursOn the CME Globex electronic platform: 2:30 AM until 2:45 PM, New York Time.ContractSizeOne Cotton No. 2 futures contract on the New York Board of Trade is 50,000 pounds net weight.
Cotton producers can also hedge against falling cotton cost by taking up places in the cotton futures market.they Can use a short hedge to lock in a future selling price for a ccontinous production of cotton that is only fit to be sold in later times.To work with the short hedge, cotton producers sell the necessary cotton futures contracts in the futures market in order to take care of the quantity of cotton to be produced.
An example of a short hedge scenario is as follows:
A cotton farmer has got into a agreement to sell 10.00 million pounds of cotton,that is to be delivered in 6 months' time. The price of selling is agreed by both teams to be based on market price of cotton on the day of delivery. At the time of the agreement,the spot price for the cotton is USD 0.9200/lb while on the other hand the price for cotton futures to be deliverered in 6 months' time is USD 0.9200/lb.
To be able to engage in the selling price at USD 0.9200/lb, the cotton farmer enters a short position in a suitable number of NYMEX Cotton futures contracts.Each NYMEX Cotton futures contract covers 100,000 pounds of cotton, the cotton farmer will consequently be required to short 200 futures contracts.
The consequences of putting the hedge in place should ensure that the cotton farmer will be in a place to sell the 10.00 million pounds of cotton at USD 0.9200/lb for a sum total of USD 4,600,000.This is got by looking at scenarios in which the amount of cotton makes a significant move either rising or going down by delivery date.
Scenario 1: Cotton Spot Price declined by 20% to USD 0.8280lb on Delivery Date
According to the sales agreement ,the cotton farmer will sell the cotton at only USD 0.8280/lb, which will resulteto a net sales of USD 4,140,000.
By the date of delivery, the cotton futures price will have merged with the cotton spot charge and will be equal to USD 0.8280/lb. As short futures position was entered at USD 0.09200/lb, it will have profited USD 0.9200 - USD 0.8280 = USD 0.0920 per pound. With 200 contracts which covers a total of 10000000 pounds, the total increase from the short futures position is USD 460,000
Both the increase in the cotton futures market and the amount got from the sales contract price total to USD 460,000 + USD 4,140,000 = USD 4,600,000. This figure is the same to selling 10.00 million pounds of cotton at USD 0.9200/lb.
Scenario 2: Cotton Spot Price went up by 20% to USD 1.0120/lb on the Date of delivery
With rise in cotton cost to USD 1.0120/lb, the cotton producer will be able to sell the 20.00 million pounds of cotton for a higher net sales proceeds of USD 5,060,000.
as the short futures position was got at a lesser cost of of USD 0.9200/lb, it will have gone at a loss of USD 1.0120 - USD 0.9200 = USD 0.0920 per pound. With 200 contractsÂ taking a total of 10.00 million pounds of cotton, thewhole loss in the short futures position is USD 460,000.
Eventually , the higher sales received is offset by the loss in the cotton futures marketwhich ends in a net proceeds of USD 5,060,000 - USD 460,000 = USD 4,600,000. Again, this is the same amount that would be received by selling 10.00 million pounds of cotton at USD 0.9200/lb.
Risk/Reward Tradeoff whereby As seen from the examples, the negative of the short hedge is that the cotton seller would have been better off without the hedge if the price of the commodity went up.(http://www.theoptionsguide.com/cotton-futures-short-hedge.aspx)
Businesses that want to buy significant quantities of cotton can protect from increasing cotton price by taking a place in cotton futures market.These organizations may apply what is known as a long hedge to obtain a purchase price for a supply of cotton that they will need some time in the future.To achieve the long hedge, adequate cotton futures are to be bought in order to cover the bulk of cotton required by the business operator.An example of Cotton Futures Long Hedge is explained as follows
A textile mill will need to get 10.00 million pounds of cotton in 6 months' time. The p spot price prevailing for cotton is USD 0.9200/lb while on the other hand the cost of cotton futuresÂ to be delivererd in 6 months' time is USD 0.9200/lb. To protect against an increase in price of cotton, the textile mill thought of locking in a future purchase price of USD 0.9200/lb by taking a long position in an appropriate number of NYMEX Cotton futures contracts. With every NYMEX Cotton futures contract covering 100000 pounds of cotton, the textile mill will have to spend long 200 futures contracts to implement the hedge.
The impact of placing the hedge must assure that the textile mill will be in a positionÂ to purchase the 10.00 million pounds of cotton at USD 0.9200/lb for a total amount of USD 4,600,000.this isrealised by looking at instances Â whre the the price of cotton makea great move either upward or down by the delivery date.
Scenario 1: Cotton Spot Price increased by 20% to USD 1.0120/lb on Date of Delivery
With a rise in cotton cost to USD 1.0120/lb, the textile mill will have to give USD 5,060,000 for the 10.00 million pounds of cotton. However, the rise in purchase price will beÂ balanced by the profits in the futures market.
By date of delivery , the cotton futures priceÂ merge with the cotton spot price and will be equivalent to USD 1.0120/lb. As the long futures position was got into at a lower price of USD 0.9200/lb, it will have got USD 1.0120 - USD 0.9200 = USD 0.0920 per pound. With 200 contractsÂ taking a total of 10.00 mil pounds of cotton, the sum total return from the long futures position is USD 460,000.
Finally, the higher purchase price is offset by the gains in the cotton futures market, coming to a actual payment amount of USD 5,060,000 - USD 460,000 = USD 4,600,000. This amount is the same as the amount paid during the buyingÂ of 5.00 million pounds of cotton at USD 0.9200/lb.
Scenario 2: Cotton Spot Price decreased by 20% to USD 0.8280/lb on Date of delivery
With spot price decreased to USD 0.8280/lb, the textile mill will just need to pay USD 4,140,000 for the cotton.but, the loss in the futures market will offset any savings made.
Once again, by delivery date, the cotton futures price will have come together with cotton spot price and will be equal to USD 0.8280/lb. As the long futures position was entered at USD 0.9200/lb, it will have lost USD 0.9200 - USD 0.8280 = USD 0.0920 per pound. With 200 contracts covering a total of 10.00 million pounds, the total loss from the long futures position is USD 460,000
Eventually, the savings got from the decrease in purchase price for the commodity will be offset by the loss in the cotton futures market and the net amount payable will be USD 4,140,000 + USD 460,000 = USD 4,600,000. Once again, this amount is equal to buying 10.00 million pounds of cotton at USD 0.9200/lb.
Risk or Reward Trade off As illustrated in the examples, the negative sideÂ of the long hedge is that the cotton buyer could have been more advantaged with no hedge if the price of the commodity fell.
Forecast commodity price outlook.
The Cotton Outlook A Index was $1.16 cents per pound by Sept. 29 2010, this value is 80 percent higher than on the same time in 2009.this was the highest price since May 23, 1995, according to the International Cotton Advisory Committee.(ICAC),The ICAC said that the company's progress in cotton prices is majorly as a result of strong market fundamentals i.e., low prices eventually led many people out of cotton, that the market does not have all it needs.
World cotton stocks decreased by 24% to 9 million tons or 41 million bales in 2009-10," the ICAC Secretariat explained in its monthly outlook report.this Marked the end of high stocks period of five years, that kept prices low.Contributing to the low prices also was the widespread recession, which led into a sharp drop of demand for textile products. in the ICAC analysis it was expressed that it is expected world cotton production to bounce back by 16 percent to 25 million tons or 115 million bales in 2010-11.
Worldwide cotton mill use will continue to get back together, however more slowly than in 2009-10 as a result of insufficient supplies and also theÂ high prices of fiber, they said. As production and consumption are forecast to roughly correspond in 2010-11, world ending stocks are not expected to increase greatly.This, added to concerns about the damage caused to Pakistan's 2010-11 cotton crop by floods, there are expected output delays in China and India, and concerns about prohibitions in shipments by a largely exporting country, have supported cotton prices in the first two months of 2010/11."The ICAC Price Model forecasts a 2010-11 season-average Cotton Outlook A Index of 90 cents per pound, 15 percent higher than last season which is also the highest since 1994/95. The 95 percent confidence interval extends from 78 to 106 cents per pound. This forecast proposes that cotton prices could go down from the current highs later in the season. However, factors from outside such as government policies affecting global cotton trade, uncertain global economic prospects, and competitiveness of prices with other fibers could affect the amount of increase in prices in 2010-11.(www.deltafarmpress.com/)