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The Importance Of Timing
  

By Kevin Brinkley
The Seam
Memphis, Tenn.

 
By now, many cotton producers across the United States are aware of the events of the week of March 3, 2008 on the Intercontinental Commodity Exchange's (ICE) cotton futures contract. To quickly recap events, the prior trading session on Friday, Feb. 29, saw May 2008 cotton settle at 81.86 cents per pound. Beginning in the early morning hours of March 3, the contract raced toward its posted limit of 84.86 cents. However, ICE rules permitted the exchange to allow the market to continue to rise synthetically by using futures options to determine its computed value. During the following day, the cotton contract continued its synthetic climb to $1.09 per pound. The resulting margin calls for hedgers (merchants, cooperatives, etc.) were astronomical. Some estimates put the number at $1.8 billion.

This brief comment does not have space for a detailed explanation of the mechanics of these events. In short, speculative traders simply overwhelmed hedgers when the price was bid up past its normal limits. What is more important is that we all understand that the impact of these events may be present in the industry for many years. While the immediate impact of last week’s market behavior has severely affected the merchant community, producers will likely feel the consequences at some point:

• Skyrocketing futures prices have stretched many banks beyond their lending limits. If margins cannot be met through borrowed capital, merchants will be more likely to operate on a short-term outlook only.

• There is the real chance that liquidity may be reduced which will, in turn, reduce the number of market options.

• Producers will also likely see a change in the behavior of the basis as merchants may consider including a risk premium in their bids to offset the risk of futures. It has already manifested itself in the grain markets. A growing number of elevators are eliminating hedge-to-arrive contracts in favor of basis only fixed at delivery.

So how do cotton producers deal with this new environment? First, it is important to understand that the decoupling of cash and futures that occurred in cotton have also impacted other commodity markets such as grain. Therefore, simply moving to another crop will not solve the problem.

As long as there is a virtually unlimited supply of money from hedge funds and other speculative investors, the same risks will be present in the market. The cotton industry, the Commodity Trading Futures Commission (CFTC) and exchange companies such as ICE will be busy trying to ensure that the markets operate as intended – to transfer risk and discover prices.

More importantly, producers need to adapt their strategies for marketing their crops. This means that a producer must evaluate his available options and be willing to time his sales to maximize income in a given season.

For example, if forward pricing alternatives do not meet financial objectives, the producer will likely have to consider waiting for the spot market to increase prices through demand pressure.

Cotton is an amazingly resilient commodity. It can withstand punishing growing conditions and punishing market conditions and still generate returns. Diligent marketing practices will ensure that producers make the most of opportunities on the horizon.

Adapting To The New World

Cotton producers need to review all of the tools in their arsenal for dealing with changing, less-certain markets. Many of the best pricing opportunities may occur in the spot market as mills need to cover near-term needs. This may create windows where the basis strengthens, and the cotton in position is poised to take advantage of the opening.

Producers confronted with these kinds of circumstances should consider putting their cotton in the market as early as possible. Many of the biggest trading days are characterized by good early prices until the quantity demanded by the market is filled. Then the market cools down until the next demand event occurs.

The Seam's Cotton Trading system is the best way to take advantage of those times. Producers listing cotton on our system have complete control of their marketing decisions and can seize opportunities when they arise. In addition, The Seam's Live Monitor provides the most reliable price information in agriculture. It is easy, guaranteed and has more buyers than any other outlet.

Need More Information?

Kevin Brinkley is vice president of marketing and business development for The Seam in Memphis, Tenn. For additional information, call (901) 374-0374 or go to www.theseam.com. Contact Brinkley via email at: kevin.brinkley@theseam.com.

 


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