• back
  • 4.10-COTTON TRADING-GUARANTEED MINIMUM PRICE CONTRACTS

  •  
  • Guaranteed minimum price contracts

    Chapter 4 - Cotton trading - Guaranteed minimum price contracts 

     
     

    Volatility has always been one of the main concerns for producers in the cotton market. Over the last five years, the average annual market movement in cotton has been 15 cents per pound. Volatility such as this means that each and every producer unwittingly becomes a speculator. In these circumstances, it is no surprise that many producers find themselves unable to manage their position, and as a result they often lose money.

    One of the roles of the cotton merchant is to offer the producer a variety of tools to try to protect themselves against this volatility. Amongst these tools is the guaranteed minimum price contract.

    The only market that facilitates the use of a tool such as the guaranteed minimum price contract is the ICE futures market. However, one of the concerns of producers outside of the United States is that ICE futures have no relevance to their cotton. When ICE is mentioned to non-United States producers, they tend to reply, ‘What has New York got to do with my cotton?’, or ‘I cannot deliver my cotton in New York’.

    However, there is a strong correlation between the direction of ICE futures and the direction of world prices, as figure 4.6 shows.

     

    4.10-en