Even as cotton finally joins the grains and oilseeds commodities boom, Australian growers have suddenly found themselves in a position where there is less competition for their bales.
Cotton prices have traded in a $US150/bale range in recent weeks, leaving many merchants wary, sitting out of the market.
According to market analysts, this is a result of the unusually volatile range of cotton futures in recent weeks, where prices have ranged about US30c/pound or $US150/bale.
That wide variance put “enormous pressure” on merchants as they sought credit to fund margin calls on their hedged futures position.
The result, depending on the day, was many of Australia’s major cotton merchants sitting out of the market and offering “no quote”. Where typically there would be about 10 merchants trading in the markets, some days of recent weeks have seen scant few prices on offer for growers.
According to general manager at FarMarCo, Rob Imray, the pattern is due to the speculative investment push into agricultural commodities, forcing these commodities to the “heady heights” of recent weeks.
“On the other side of that in cotton, the trade was sitting on a lot of physical cotton which was hedged in the futures market,” Mr Imray said.
“The fund money kept pouring in and it got to the point where the merchants had to fund significant margin calls in order to hold their hedgers on the bales they owned.
“And that put tremendous pressure on merchants because they found it extremely difficult to unload physical cotton in order to get cash in the door.”
He said, then, as merchants looked to sell cotton, but with few buyers available at the high prices, the basis market weakened.
And while prices appear to be returning to more predictable levels this week, it remains unknown how long the wariness will remain in the market. The full suite of merchants is not yet putting prices back into the market.
“Luckily, to some degree things spiked up and it game back fairly readily, so the pressure has gone right off them (the merchants) but it would be fair to say it has been a difficult time for many in the trade,” Mr Imray said.
He said while he expected normalcy to return soon, he warned the situation could remain difficult for growers and that domestic basis levels could besignificantly weaker in the future.
“Following on from drought and the credit crunch, gone are the days when we had 10-12 merchants killing each other to get cotton.
“We will get to the point where there are four or five on a given day, but at the moment you couldn’t even count that many.”
Chairman of the Australian Cotton Shippers Association, Pete Johnson, said growers had still been able to achieve a price on most days, but agreed that there was currently less competition for grower bales than normal.
He said the crux of the issue centred on the cash flow implications created by the recent unprecedented market volatility and associated massive margin calls.
“Normally you wouldn’t have to come up with that big of a margin that quickly.
“Now we have realised the potential volatility the hedge funds can bring to our market – and merchants have to reassess how they price that risk, particularly with regards to the size of the positions they are prepared to run.”
He added that there was the further problem in that spinning mills were not confident that the futures market reflected physical pricing.
“We need to sell some Aussie cotton to find out what it is worth. It is a matter of getting those sales on the books, waiting for the market to calm down, and for spinners to get comfortable again, and hopefully we can get back in with all guns blazing.”
He said the market was going through a period of readjustment that would, hopefully, be a good thing.
“We are all aware that there is new crop coming forward. I think growers will be able to achieve some price discovery reasonably soon.
“There will be some pretty fierce competition so growers do not need to worry about missing out on a fair and accurate price.”
