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  • 1.3.1-THE WORLD COTTON MARKET-COTTON PRICES MEASURED AT MANY LEVELS

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  • Cotton prices measured at many levels

      Chapter 1 - The world cotton market - Cotton prices

     
     

    When people in the cotton market speak of prices, they are usually referring either to the Cotlook A Index or to the latest prices quoted for the nearby futures contract on ICE Futures U.S., Inc. in New York. However, on any day there is a constellation of cotton prices determined by quality, location and delivery schedules, and relationships between prices in the supply chain change constantly.

    The Cotlook A Index is the most often quoted indicator of the average level of international prices. The A Index is compiled by employees of Cotlook Ltd, a private company in Liverpool, United Kingdom, who receive price information from both buyers and sellers of cotton from many origins. Often the price quotes reported to Cotlook vary by wide margins, especially for cottons from origins with little volume. In these cases, the Cotlook employees must exercise their own judgement to determine the prevailing offering rate for cotton from each origin. To calculate the A Index, Cotlook averages the offering values of the cheapest five origins delivered to East Asia for nearby shipment for middling grade cotton of 1–3/32" in length. It is widely understood that actual transaction prices could be lower than the offering values quoted by Cotlook, but the A Index is still respected as a valid indicator of average price levels. Cotlook also quotes an A Index for North Europe and a North Europe B Index for shorter staple cotton. Both North Europe Indexes will be discontinued after 31 July 2008.

    In contrast, futures prices represent actual transactions prices for United States cotton of a very specific description delivered to specific locations on specific dates. Futures prices are determined by open outcry in a trading pit, or by public auctions conducted over computer networks. As a consequence, there is no judgement involved in reporting prices. On the other hand, futures prices are very specific to the type, quality, location and time of delivery. Therefore, futures prices are not always good indicators of international price trends or prices of cotton from countries other than the United States.

    Mill-delivered prices and prices received by farmers can vary substantially from quoted international values. Prices for cotton delivered to mills include the costs of transportation, storage, insurance, interest costs, loading and unloading required to deliver bales directly to mill warehouses. Some mills buy an entire year’s worth of cotton at the start of each season and incur the costs of storage, interest and insurance internally. Other mills buy and schedule delivery week-to-week, and prices for services are negotiated in each contract. Farm prices in developing countries are usually quoted to farmers on the basis of seed cotton delivered to collection points. In such cases, prices paid are lower than prices paid for lint to account for the cost of ginning, and delivery of lint and seed to markets. In some countries, farmers are paid on a lint basis after ginning. In all cases, prices for individual lots of cotton will reflect discounts or premiums for quality different from the base qualities quoted in international markets.