It’s going to happen, and everyone knows it. Sooner or later, the industry will settle on a global cotton contract to complement the current ICE Futures US contract. The only unknowns are when it will be implemented, and what the final version will look like.
At press time, the primary issue is whether delivery points will be at origin (production) or destination (consumption). They both have their advantages: Cotton at point of consumption is value added, and thus worth more … but it likely will be hard to get the shipment into position to deliver on short notice, which is not necessarily true at the point of production.
Based on conversations I had with various stakeholders at last week’s American Cotton Shippers Association (ACSA) meeting in New Orleans, it appears the majority of people believe either of those options would be an improvement over the current arrangement.
However, there is a small-but-powerful group that asks …
If It’s Not Broke, Why Fix It?
Most of the debate is currently centered on origination vs. destination, but there are other topics that need to be addressed, and other obstacles to overcome before a global futures contract can be put into place. The primary points of contention are:
- Some people view the addition of a global contract resulting in two diluted, weakened contracts, rather than a single, strong one. That remains to be seen, but given the industry’s recent (and very painful) struggles with contract sanctity and defaults, it’s a point worth considering carefully.
- Let’s face it: Some stakeholders in cotton are doing quite well under the current ICE Futures arrangement. Change is difficult enough to encourage under any circumstances, but when some of the players are flourishing in the existing system, their motivation is to actively fight to maintain the status quo. That kind of inertia is extremely difficult to overcome.
This is not really a philosophical debate, because in the end, it’s all about volume – that’s one thing everyone involved can agree on. People are divided because some think origin will result in greater profitability, and the others think destination will produce greater profits. The trick is figuring out which group is right.
After a very long period of relative stability for cotton, these past five years have shaken the industry to its foundation. It might take one year to agree on and implement a world cotton futures contract, and it might take five years, but it’s coming.
If it can deliver on its promise of stabilizing prices and getting cotton off of this five-year rollercoaster ride, the sooner the better.