Pricing of Australian Cotton Cotton Commodities

Australian cotton prices are highly volatile and are driven primarily by international factors. The key price drivers are the New York Cotton futures contract and the Australian Dollar.

Farmarco provides independent market information, analysis, advice and execution services to support cotton producers and consumers manage their price risk.

How is Australian cotton priced?

The Australian cotton industry operates in a sophisticated, deregulated market with numerous ginners, merchants and producers. While the majority of cotton produced is sold using forward contracts (selling physical cotton forward for up to five years), there is a complex market for hedging/pricing cotton including using futures, options, Bank SWAPS and on call contracts.

Over 90% of Australian cotton produced is exported and local cotton prices are heavily influenced (as shown) by the Intercontinental Commodity Exchange (ICE) No.2 Cotton futures contract (a US based contract), movements in the Australian Dollar and basis.

Having an understanding of how the market works and what are the current price drivers is extremely important in your marketing decision making process.

The Daily Price for Australian Cotton

Each day, cotton buyers (merchants) will post prices at which they will buy cotton for up to 5 years forward. This price is calculated with reference to ICE Cotton futures, the Australian dollar (AUD/USD) and a basis component as shown in the following pricing equation.

Cotton Futures price formula

The futures market is highly transparent as is the exchange rate, however each cotton merchant will have a modified basis according to their own commercial requirements. The basis is the X factor in the price.

Farmarco bring you unparalleled expertise not only in understanding where the price is today and possible future direction but also managing the price risk.

Australian cotton prices FOB Ginyard

Click to download a larger version of this graphic as a PDF.

Why manage cotton price risk?

Cotton price risk is managed for three main objectives:

  • To achieve a known price for the cotton (lock in a profitable price),
  • To limit the risk of the price falling and thus adversely impacting on profitability and
  • To smooth out the volatility in the price received (shore up a more certain cashflow).

Farmarco’s philosophy is that cotton price risk should be managed with the objective of consistent profitability.

For example: Over the 20 years (to 2014 Season), Australian cotton prices have tended to trade within a $380 to $520 range. If you had 1,000 bales to market then the value of the bales would vary between $380,000 and $520,000 (a variation of $140,000). This can be the difference between breaking even and being highly profitable. With few additional physical inputs effective marketing and price risk management can have a direct influence on your bottom line.

Products available for marketing and price risk management

  • Forward cash price (cotton contracted forward in either A$ or US$ a bale)
  • Spot contracts (cotton contracted forward in A$ a bale for delivery within seven days)
  • On-call contracts (the ability to contract forward or post ginning but break the pricing up into its components of futures, basis and currency)
  • ICE futures and Options contracts (used to hedge price risk)
  • Bank Swaps in A$ or US$ terms based on ICE futures (used to hedge price risk)
  • Pools

« Farmarco Cotton Commodity services

Contact Farmarco to discuss which of the three Cotton Commodity service options best suits your needs.

Farmarco    104 Herries Street, Toowoomba, Queensland    Phone: +61 7 4637 6400    Fax: +61 7 4637 6464    Email: farmarco@farmarco.com.au