U.S. cotton stands to lose its place as the sole pricing bellwether for cotton around the world with the launch of a new global cotton futures contract next week.
The new contract, which will trade under the symbol WCT, begins trading on the ICE Futures U.S. exchange at 9 p.m. Sunday alongside the U.S. “Cotton No. 2” contract – a physically settled contract for U.S. origin cotton that has long provided the only hedging option for cotton traders.
Demand for the contract’s launch is indicative of the U.S. cotton industry’s dwindling role in the world cotton market. While the U.S. is still the world’s top exporter of the fiber, India, Brazil and Australia have emerged as significant competitors in recent years investing in production while fewer U.S. farmers plant cotton.
The new world cotton contract is not likely to replace the U.S. contract, but rather it will have a “smaller, complimentary role,” said Benjamin Jackson, president and chief operating officer of ICE Futures U.S.
Cotton of various origins will be priced at a premium or discount to U.S. cotton under the contract.
In addition to U.S. delivery points, this new world contract also allows delivery in Australia, Malaysia and Taiwan for cotton from the U.S., Australia, Brazil, India, Benin, Burkina Faso, Cameroon, Ivory Coast and Mali. Collectively, those origins represent 73% of world cotton exports, according to ICE.
A decade ago, the U.S. accounted for 21% of the world’s cotton production and 39% of exports; this year the U.S. is expected to drop to 12% of cotton production and 30% of exports.
The big textile mills are in India, Pakistan, Indonesia, and Bangladesh. In the physical market, cotton traders are transacting in these same locations.
“We selected these delivery points and origins because these are the most common origins of cotton that are sent to the Far East for the production of clothing and yarn,” said Jackson.
ICE successfully pushed to change a 99-year-old law so that international graders could check that cotton meets USDA standards and to allow cotton to be delivered by multiple methods. In the U.S. cotton is delivered in bales, compacted lint that weighs about 500 pounds, not so in other cotton producing countries.
The first physical delivery month for the contract will be May 2016, Mr. Jackson said, to allow time for logistical operations to get set up at various delivery points.