Global prices of lint or processed cotton have plummeted, with the December futures contract falling below US$1 since January this year, a situation that may see local merchants struggling to pay farmers during this marketing season.
At the time the producer price for cotton was announced last month (at 30 US cents per kg), lint price was at US$1,20 per pound (0,45kg) but the futures contract for December is down to 89 US cents on the New York Intercontinental Exchange (ICE).
The sharp decline will squeeze the margins of some local cotton merchants, especially those that had not put forward sales and fixed the price to combat price volatility.
Over the last two years, cotton futures contracts shot up to record highs, from US48,35c per pound in April 2020 to nearly US$1,60 per pound in April 2022, partly due to good yields last summer while an increase to pre-pandemic demand aided that growth.
“This fall in the price will squeeze the margins of cotton merchants who may find it difficult to continue paying the current producer price; some merchants may suffer heavy loses,” said an executive with a cotton company.
“It might be difficult to present our case to Government but if the prices do not recover, viability is threatened,” he said.
Clever Isaiah, the chief executive of the Agricultural Marketing Authority (AMA), a State agency that set the cotton producer price said “the fall in prices does not necessarily follow the producer price should be reviewed”.
“Some of the companies could have entered into the contracts and fixed the prices to hedge against price fluctuation so they won’t be affected,” he said.
“But even for those that had not fixed the price, the slump may not persist. Prices fluctuate and (hopefully) they recover.”
Lint fibre is one of Zimbabwe’s major export commodities. The bulk of the fibre is sold on global markets but Zimbabwe is a price taker because it cannot compete with huge volumes produced by countries such as China, the U.S, Australia, India among others.
When talking of lint prices, they usually refer to Cotlook A index or to the latest prices quoted for the nearby futures contract on ICE futures (Memphis) in New York.
An index is defined as the average of the cheapest five quotes delivered to the Far East Asian markets while ICE futures form the basis for live cotton trading.
However, on any day there is a constellation of cotton prices determined by quality, location, and delivery schedules to mention but a few thus relationships between prices in the supply chain do change quite often.
As such, lint prices will never be static since they are fixed at different times. Cotton trading is guided by International Cotton Association (ICA) rules and regulations.
Once prices are fixed it’s irreversible – performance must happen. There are two methods of fixing prices. Spot price refers to selling lint for immediate use or settlement on the spot date. It is commonly used in a rising market to realize actual mark-up for any given transaction. Also, when a trader wants to avoid late delivery penalties, sales can be done on the spot since the product will be readily available for shipping.
However, on spot can be done on forwarding contracts, especially in a bullish market.
When the market is bullish, it naturally becomes wiser to sell on spot but limited to certain quantities to avoid over-commitment otherwise losses can be realised due to late delivery claims and or failure to perform. On-call price involves a forward volume contract with agreed pricing formulas being fixed at a later date but before delivery starts.
The method of fixing price is best suitable when the market is stable. It’s a cautious approach to fixing lint prices based on the available stock at any given time. Prices are fixed before delivery starts upon delivery of lint. All eggs can’t be put in one basket.
Risk should be spread thus for a balanced lint order book both methods should be used depending on market forces. Zimbabwe, being a price taker given that it can’t compete with huge volumes by global giants such as China , the US, Australia, India, certain windows can be taken advantage of to achieve better prices if the market is firm.
Traders usually sell lint before the northern hemisphere crop becomes available. If the window is missed, serious buyers might be difficult to get. Thus ICE futures represents better deals.