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  • 4.5.1-COTTON TRADING-COTTON FORWARD CONTRACTS

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  • Cotton forward contracts

    Chapter 4 - Cotton trading - The former NYBOT and now ICE Futures U.S. cotton marketplace

     
     
    The development of the steam ship changed the way cotton was bought and sold. When information could travel faster on a steamship ahead of the actual goods that followed on a sailing ship, the process of negotiating cotton prices became more complex and speculative. Forward contracts on expected delivery of cotton still on the docks on the other side of the Atlantic began to replace immediate transactions of cotton arriving in port.

    Movement of market information instead of the physical arrival of the commodity in port became a dominant factor in pricing cotton. Moreover, the successful installation of the transatlantic cable and the use of the telegraph made key market information instantaneously available on both sides of the Atlantic (New York and Liverpool), and intensified trade of forward contracts on cotton. As the practice of forward pricing increased and market information played a greater role, the need to bring some order to this process necessarily led to the creation of the cotton futures exchange – a place where market information, competitive buying and selling, and the shifting of risk exposure could take place in an organized manner.

    Futures trading started on the American side of the Atlantic in 1870 in New York because cotton traders could no longer agree on who should assume the price risk inherent in a forward contract during the six weeks time it took for a shipment to make its way across the Atlantic.

    On 20 July 1870, 106 cotton merchants and brokers signed an agreement to support plans for an organized marketplace where some sense of order could be brought to the business of buying, selling and (most important) pricing of cotton. The result – the New York Cotton Exchange (NYCE) – officially opened for business on 10 September 1870. NYCE quickly grew into a highly visible, liquid futures marketplace. The addition of options on cotton futures in 1984 affirmed NYCE’s central role. In 1998, NYCE merged with the Coffee, Sugar and Cocoa Exchange, Inc (CSCE) to become the New York Board of Trade® (NYBOT®). As a result of the tragic events of 11 September 2001, NYBOT’s location at 4 World Trade Center in downtown Manhattan was lost, and NYBOT united with the New York Mercantile Exchange (NYMEX) and the Commodities Exchange (COMEX) in a new Manhattan building. NYCE (NYBOT) holds the distinction of being the oldest commodity exchange in New York. It is also the longest-running cotton exchange in terms of continuous operation in the world.

    Price risk has always been a central characteristic of the cotton industry. The need for transparent and effective price discovery and price risk transfer has made cotton futures and options critical risk management tools for all those who grow, trade, and mill cotton as well as to those involved in the manufacturing and selling of cotton goods, and the NYBOT remains a premier marketplace for cotton futures and options and the central pricing mechanism for the cotton industry internationally.