What you need to know about lint trading
Lint, or processed cotton is one of Zimbabwe’s major agricultural export commodity. The bulk of the fibre is sold on global markets but Zimbabwe is a price taker because it cannot compete with huge volumes produced by countries such as China, the U.S, Australia, India among others.
When stakeholders in the cotton industry talk of lint prices, they usually refer to Cotlook A index or to the latest prices quoted for the nearby futures contract on International Exchange ( ICE) futures (Memphis) U. S in New York.
A index is defined as the average of the cheapest five quotes delivered to the Far East Asian markets while ICE futures forms the basis for live cotton trading.
However, on any day there is a constellation of cotton prices determined by quality, location and delivery schedules to mention but a few thus relationships between prices in the supply chain do change quite often.
As such, lint prices will never be static since they are fixed at different times. Cotton trading is guided by International Cotton Association ( ICA) rules and regulations. Once prices are fixed its irreversible – performance must happen .
There are two methods of fixing prices namely spot and on call. Spot price refers to selling lint for immediate use or settlement on the spot date. It is commonly used in a rising market to realise actual mark up for any given transaction. Also when a trader wants to avoid late delivery penalties, sales can be done on spot since the product will be readily available for shipping.
However, on spot can also be done on forward contracts especially in a rising market. When the market is bullish, it naturally become wiser to sell spot but limited to certain quantities to avoid over commitment otherwise losses can be realised due to late delivery claims and or failure to perform.
On call price involves a far forward volume contract with agreed pricing formulas being fixed at a latter date but before delivery starts.
The method of fixing price is best suitable when the market is stable. Its a cautious approach of fixing lint prices based on available stock at any given time. Prices are fixed before delivery starts upon presentation of lint.
All eggs cannot be put in one basket. Risk should be spread thus for a balanced lint order book both methods should be used depending on market forces.
Zimbabwe, being a price taker given that it cannot compete with huge volumes by global giant producer such as China, the U. S, Australia, India, certain windows can be taken advantage of to achieve better prices if the market is firm.
Traders usually sell lint before the northern hemisphere crop becomes available. If the window is missed, serious buyers might be difficult to get.
ICE futures represents actual transactions. The report quotes prices based on Cost Insurance and Freight Far Eastern main ports. Most sales in Zimbabwe are done ex works meaning the price basis on ICE reports attracts discounts in order to arrive from ICE Cost Insurance and Freight to ex works.
The discounts include basis price, transport and quality. Quality becomes applicable if the product being shipped is lower than expected.
The basis for price formulation can go up or go down depending on market fundamentals. Research has shown a basis hovering between 2 to 6 US cents per pound, transport averaging 4 US cents per pound and quality discounts up to a maximum of 10 US cents per pound for very low grade cotton lint.
Thus more effort should be done to improve the quality of Zimbabwean cotton. The bulk of seed cotton is in Cs and D grades a sign which compromises lint quality on the global market.
Drought has also caused the weakening of fibres and the variety being grown by more than 70 percent of cotton farmers is tired. There is need to invest in new hybrid varieties.