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 market information, analysis, advice and execution services to support cotton producers and consumers manage their price risk.
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.
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.
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.
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Cotton price risk is managed for three main objectives:
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
Contact Farmarco to discuss which of the three Cotton Commodity service options best suits your needs.
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