price volatility in the world cotton market: causes , impacts, and mitigation
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Price Volatility in the World Cotton Market: Causes, Impacts, and
Mitigation
Plastina, A. and T. TownsendInternational Cotton Advisory Committee (ICAC)
USDA Outlook ForumFebruary 24, 2012
Cotlook A Index August 2010 - February 2012
Aug-10 Dec-10 Apr-11 Aug-11 Dec-110
50
100
150
200
2502010/11
2011/12
A Index, US cents/lb
Factors Affecting Cotton Prices in 2010/11
Aug-10 Nov-10 Feb-11 May-11 Aug-110
50
100
150
200
250
2010/11
Low stocks
Unexpected surge in demand
Collapse in mill use
Broken contracts (sellers)
Unexpected government in-terventions
Broken contracts (buyers)
Speculation surges
Floods in Pakistan
A Index, US cents/lb
75/76
76/77
77/78
78/79
79/80
80/81
81/82
82/83
83/84
84/85
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
-60%
-30%
0%
30%
60%Season highest value
Season lowest value
Difference with respect to season average
Price Volatility by Season: Cotlook A Index
2011/12: 1 August – 21 February
75/76
76/77
77/78
78/79
79/80
80/81
81/82
82/83
83/84
84/85
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
-60%
-30%
0%
30%
60%Season highest value
Season lowest value
Difference with respect to season average
Price Volatility: Cotlook A IndexFirst 7 months of each season
August – February
75/76
76/77
77/78
78/79
79/80
80/81
81/82
82/83
83/84
84/85
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
0%
10%
20%
30%Coefficient of Variation
2011/12: 1 August – 21 February
Price Volatility by Season: Cotlook A Index
75/76
76/77
77/78
78/79
79/80
80/81
81/82
82/83
83/84
84/85
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
0%
10%
20%
30%Coefficient of Variation
Price Volatility: Cotlook A IndexFirst 7 months of each season
August - February
Ranking of Cotton Price Volatility among 64 Commodity Prices (RS)
80/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
90/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
00/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
10/11
2011/12
1
11
21
31
41
51
61
1
15
2011/12: August - February
Price Level vs. Price Volatility: 1973/74 – 2010/11
0 50 100 150 2000%
40%
80%
120%2010/11
A Index in US cents/lb
Volatility of A Index
Impacts of Volatility
Drop in Market Share Industry Exit
Defaults Increased Cost of Hedging
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
30
40
50
60
35.633.5
Percent
Average 1960-2010
Market Share of Cotton in World Textile Fiber Consumption
LARGEST MERCHANTS
1994 2006 20100
200
400
600
800
360470
690
Chart TitleAvg. Trading Volume, Thousand Tons
Capital Requirements
2007: $6 in Credit per $1 in Equity
2010 & 2012: $3 in Credit per $1 in Equity
ICA Arbitrations
2003 2004 2005 2006 2007 2008 2009 2010 20110
50
100
150
200
250
2 cent Option PremiumsDecember ContractsFebruary each year
2007: 4.6 cents out of money
2010: 14 cents out of money
2012: 19 cents out of money
Tools of Mitigation
Price suppression will not work
Hedging Instruments Transparent Policies
Enforcement of Contracts Timely Statistics,
Metric Measures
Price Volatility in the World Cotton Market: Causes, Impacts, and
Mitigation
Plastina, A. and T. TownsendInternational Cotton Advisory Committee (ICAC)
USDA Outlook ForumFebruary 24, 2012
Average A Index vs. Volatility Measures by Seasons
A Index
Relative Spread
A Index
Coefficient of Variation
Cotlook A Index 2011/12
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-1280
90
100
110
120
130
140A Iindex, US cents/lb
Changes in Industry Structure
Firms exited in 2008Jobs were lost in 2011
Multi-commodity firms replacing traditional family-owned cotton businesses
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