Australia
September 13, 2007Source:
Cotton Seed Distributors
In this weeks WoW Tom
Galbraith from Independent Commodity Management discusses
marketing considerations for dryland cotton.
Watch the interview on video at
http://www.csd.net.au/
My name is Tom Galbraith and I
am from Independent Commodity Management based in Moree. We are
an independent marketing advisory service to cotton and grain
growers. I am here to give you a little bit of a run down on our
thoughts on marketing considerations for dryland cotton for this
season and any in the future.
I have got three points that I would like to go through. Firstly
I would like to talk about the types of contracts that you might
use for marketing cotton. The second point I would like to talk
about is quality and how that affects the bottom line or the
price that you receive at the end of the day and the third point
I would like to go over is market conditions or the outlook as
we see it at the moment.
With regards to contracts, the first and most common contract
used in about 90% of transactions for both irrigated and dryland
cotton, that is a Cash Price, Fixed Bale Contract. Most of you
would know what this is, it is a fixed bale contract at a fixed
price and in this case force majeure does not apply. Force
majeure for those who don’t know is a contract where the
production risk is born by the buyer and not by the grower so
they affectively contract on an area base and whatever you grow
from that area is under contract so in this case it does not
apply.
The second type of contract is an On Call Contract. It is also a
fixed bales at a fixed price contract, but that fixed price is
not known until all three legs of the contract are fixed. Those
three legs are FX, Futures and Basis, all combining to give you
an Aussie dollar bale price once fixed at the end of the
contract. In this case force majeure does not apply also. With
On Call marketing, it requires a greater level of marketing
sophistication and time and in that case it generally does not
suit many growers.
The third contract I would like to talk about is fixed price
force majeure contracts. Typically a force majeure contract is
most attractive for dryland cotton growers given that you can
pass the production risk onto the buyer. I guess the only down
side is if the market does rally after you have contracted then
you don’t get a chance to pickup on that rally and prices.
The fourth type of contract is a Seasonal Pool Contract. This is
typically an area commitment made to a particular merchant and
an indicative price range is given by that particular pool
manager and in this case force majeure does also apply so it is
another attractive option for dryland growers. I guess the point
I would make about pool is that you need to have an
understanding of the pool managers recent historical performance
to know whether he is going to meet the targets that he has set
with his indicative range and must realise that the outcome that
you receive may be less than that indicative range, that is what
it is an indicative price. It is a useful tool to sell the
balance of crop closer to harvest time.
The next point that I wanted to talk about is quality and the
factors that affect your bottom line. Most important thing to
consider is premium and discount sheets. Premium and discounts
are getting tougher and there is certainly something to make
sure you are aware of the particular premium and discount sheet
that applies to your contract.
Varietal selection is also an important consideration that will
affect your quality obviously and certainly seek specialist
advice from the likes of James or your particular agronomist as
to which varietal traits you should be seeking for your growing
area. Row spacing and rotation and I guess GMO certainly have an
impact on quality as well.
The fourth consideration is independent classing. ICM clients we
recommend our clients use independent classing rooms and would
certainly encourage dryland cotton growers to also seek
independent classing, simply because you are paying the classer
to do the job for you.
The next slide is an example of a P&D schedule. I have chosen
Cargill Cotton simply because it is a middle of the range
Premium and Discount Sheet. Certainly hard to see on a slide but
that is not the point that I want to make. What I would like to
point out to you is the areas on a premium and discount sheet
that you should be focusing on, those being the micronaire
discounts, the length discounts for short staple and if there
were to be problems with wet weather at harvest, colour.
Certainly be aware of those discounts up front. Focus on the
discounts not the premiums. Also I would recommend that your
request a P&D up front so that you know what your worst case
scenario is.
No marketing presentation would be complete without having a
look at the market conditions at the time. At the moment we are
seeing prices getting back to a level where we haven’t seen them
for some time. That is a direct result of over supply of cotton
in the world market. Stocks to use in the future may become
squeezed but at the moment conditions are ideal for growing
areas such as India and China. Domestic stocks in China are the
big unknown and that’s certainly played into the markets hands.
World carryout is forecast to decline year on year by 10% but we
are not seeing the full affects of this in the market place at
this time but we do expect in the future to see that rally flow
through to futures. The recent Aussie strength has also tempered
the rally in New York taking the edge off prices. Historical
high grain prices are also having their impact and we will see
that not so much for this season but into 08/09 as cotton
attempts to buy back acres from grains that have been planted
there at the moment.
Domestic basis is certainly firm at the moment and we expect
that to continue given the current crop outlook for Australia.
Last years Aussie crop as you well know was one of the smallest
in 20 years and this seasons crop is likely to be half that.
I would like to put up a slide of ex-gin bale price over the
last 10 years and a simple average line, the red line is the
average at around $440 a bale. As you can see we have spent
quite a bit of time above the line the early parts of 2000 and
2002/03 but since then we have spent a lot of time, three years
to be exact underneath that red line and are only reaching the
average of late. I guess that this has given us few
opportunities to sell at high prices. Going into the future we
do expect that we will get opportunities at above average and
closer to the usual target of $500 a bale but I do think those
opportunities will be limited so take them when and if you can
get them.
Cottonseed ex gin values are high simply due to high grain
prices and this will flow through to the price you receive net
of seed. I would encourage you to take advantage of the current
cotton seed prices when you look to take a forward position with
a bale price, please consider that currently you will receive
about $40.00 a bale back for your seed so it is certainly worth
putting into the budget.
So in summary, I would just like to put out a little chart
together of the four contracts that I went through earlier and
just detailing their suitability and their availability.
First of all the Cash Price Fixed Bale its of moderate
suitability to a dryland cotton grower give that there is some
risk in taking a forward position and they are available on a
daily basis from most merchants.
On Call is likewise daily from most cotton merchants but we feel
that the suitability of a on call contract is low given the time
taken required to manage that position.
Fixed Price FM is obviously what you would like to target for a
dryland scenario however the opportunity to capitalise or take
advantage of a fixed price FM contract is generally rare,
currently rare at the moment.
Pool is also quite suitable and generally I would not say rare
but typically closer to harvest they will get offered.
On the quality side I guess my points in summary are fix your
P&D up front and have an understanding of your downside, be
prepared to pay for your classing with an independent classing
room, have a look at what varieties suit your particular area so
that you ensure that the quality is as good as it could be and I
guess make sure you book in the rainfall at the required times
although we are in the lap of the Gods there.
With the market we feel that your opportunities will be
presented in the near future but it is just a matter of biting
your time and targeting an above average price and understanding
your risks in taking a forward position.
Watch the interview on video at
http://www.csd.net.au/
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