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Why Not Auction Your Cotton?

Kevin Brinkley The Seam Memphis, TN

Kevin Brinkley
The Seam
Memphis, TN

If you want to sell something for the highest possible price, you should try a method that dates back to around 500 B.C. That’s around the time humans first used auctions as a means to a higher price. Your first thought may be, “I’ve never heard of an auction for cotton.” And you are correct if you think an auction is strictly a fast-talking, hammer-wielding dude in a room full of bidders.

However, it is possible to auction your cotton to the highest bidder without having all of the bidders in the same room. For 39 years, farmers have been using online trading to recreate the auction effect for their recaps. In fact, since 2000, The Seam has handled billions of dollars in farmer transactions through its online trading system.

example recapHere’s how it works. The chart at right tracks the actual bidding activity of a typical online recap. In this case, the bidding started soon after the recap was offered around 2:42 p.m. Over the course of the next few hours, 12 buyers engaged in bidding the recap online. As bids were placed on the recap, an expected bid trend developed as prices gradually moved higher. This was the result of buyers starting low and inching up their price in hopes of discovering the minimum price to buy the recap.

The prices that stand out are the ones that are well above the trend line. These are the “outliers.” Buyers with unique market circumstances create these “outliers” with “higher than trend bids.”

For example, an outlier bid may be from a buyer that owes a certain quality of cotton against a sale and thus must pay a high price to ensure his ability to deliver. It’s also possible a buyer with unique market knowledge may place an outlier bid.

If a profitable merchandising opportunity is known to exist and a buyer sees it, he will seize it. Situations like this are normal occurrences on The Seam’s cotton trading system.

And while it’s not unusual for farmers to beat the market if their timing is right, they can always be assured that their cotton will find the market in the most transparent and competitive marketplace available.

This recap sold just after about three hours on the market. It sold online for a little more than 5 cents per pound over futures with all charges paid. For recaps that traded one-to-one negotiation style (over the phone), typical sales on the same or better style cotton were about 2.5 cents per pound less on the same day. We label this as “previously undiscovered margin.”

The cotton farmer that sold this recap used technology not only to produce his crop but also to sell it. Selling online allowed him to create his own auction with the potential of more than 80 different companies competing for his recap.

Finding The Tools
Given the current cotton market fundamentals, you need the right tools to help squeeze every dollar from your crop. As a seller of cotton, there are a couple of foundational issues that work in your favor.

First, the mix of merchants and cooperatives originating U.S. cotton has changed significantly over the past few years. Recognizing this change is important because it has affected who buys cotton from farmers. In addition to the well-known buyers of U.S. cotton, there are a number of new companies that have entered the U.S. origination market.

Second, it’s important to realize that importers still prefer U.S. cotton. Importers see the U.S. market as the land of opportunity because of our fiber quality and availability.

Both of those factors mean that there is demand for your cotton. So why not use them to auction your cotton to the highest bidder? To create an auction-effect for your recaps, there is a critical need – “liquidity” or a sufficient number of serious bidders trying to buy your cotton. But how do you find liquidity? The Seam.

Now is the time to consider using technology to your advantage in selling your cotton.

Need More Information?

Kevin Brinkley is senior vice president 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.