Cotton's Agenda -
By Mark Lange
The impact of unregulated investments by index funds and other speculators has resulted in a significant divergence of cash and futures prices. The cotton futures market is now unable to discover future prices with any historical correspondence to cash prices and unable to provide a cost-effective hedging mechanism. A recent example is that over a period in late June and early July, the December 2008 futures fell from the low 80 cents range to the low 70 cents range – without a significant change in market fundamentals.
Along with being relegated to market bystanders, producers are troubled about the recent price volatility’s impact on the liquidity of buyers, those with whom producers previously have contracted new crop sales. The inability of merchandisers – both private merchants and marketing cooperatives – to hedge effectively their risks translates into a weaker basis and lower prices offered to the producer. As a result, traditional merchandising relationships between producers and buyers have ceased because price risks are too great for short hedging purposes.
Merchants are no longer offering forward contracts to producers. Producers not only don’t have the ability to take advantage of pricing opportunities but also are unable to convince their bankers to assume similar risks for their own price protection.
The House Agriculture Committee, which is reviewing possible amendments to the Commodity Exchange Act, was told by the National Cotton Council (NCC) that the futures market must be returned to its historical function of price discovery and risk management relative to real market conditions. The Committee also was told that cotton producers face extreme pressures from escalating input costs which threaten their viability but have no mechanism to forward price their production at reasonable costs.
The NCC also is urging Congress to provide the Commodity Futures Trading Commission (CFTC) with the necessary authority and resources in order to better protect market participants against manipulation. The NCC concurred with the American Cotton Shippers Association that more transparency in trading and reporting is needed. Also conveyed was that the CFTC should require reporting by market participants of swaps and over-the-counter activity. Speculative limits and reporting requirements must be consistent across all market participants. Consideration also should be given to increasing speculative position margins and disallowing any increase in speculative position limits.
In early June, the CFTC announced several policy initiatives – including a cotton market investigation. The NCC hopes the ongoing probe will yield some definitive outcomes to address the ongoing concerns with the cotton futures market. Restoring confidence in that market is of the utmost importance to our industry.
Mark Lange is president
and chief executive officer for the National Cotton Council of America.
He and other NCC leaders contribute columns on this page.