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