Page 14 - 08 Cotton SA March 2016

Why Cotton

Hedgers

need a Global

Contract

EXTRACT FROM AN ARTICLE BY BEN JACKSON, PRESIDENT OF ICE FUTURES U.S., INTERCONTINENTAL EXCHANGE, INC.
(NOV/DEC 2015)

Cotton has had a long-standing spot at the centre of the global textiles industry, but the last decade
has seen a pronounced shift in the commodity’s production and exportation. In 2003 and 2004, the U.S.
accounted for 19% of the world’s cotton production and 41% of global cotton exports. Just ten years later,
in 2013 and 2014, the U.S. accounted for 11% of world cotton production and 27% of the product’s exports
-- a 42% and 34% drop respectively.

or decades, the ICE Cotton No. 2 futures contract served need to complement the highly liquid benchmark Cotton No. 2,
as the primary hedging tool for the U.S. cotton industry. which provides a regional hedging mechanism in the U.S.
However, as regional policy changes, weather conditions
and global competition continued to change the
Fcomposition of the cotton market, it became clear that
a global contract was needed to enhance the market’s ability to Major Milestones in the Creation of a World Cotton Contract
price in response to the changing environment. At ICE, we have a history of working with customers and global
regulators to overcome hurdles and adjust to evolving market
changes. In the case of world cotton, our group faced two major
Adjusting to an Evolving Market hurdles in creating the contract: The U.S. Cotton Futures Act and
Malaysian Import Laws.
Knowing the market was transforming, in December 2013, the
ICE Futures U.S. team stepped up conversations with the cotton
trade about the creation of a new contract that would track the
world cotton market. Our goal at ICE was to develop a contract U.S. Cotton Futures Act
that would meet the risk management needs of a global audience The U.S. Cotton Futures Act applies to any physically delivered
of cotton producers, merchants, spinners and mills. cotton futures contract listed on a U.S. exchange. Previous
versions of the Act required that the USDA grade all cotton
In collaboration with the cotton trade, market participants
and major industry groups such as American Cotton Shippers delivered on U.S. cotton futures contracts, with no other graders
Association (ACSA) and International Cotton Association (ICA), permitted, and that each bale delivered be classed. The Solution:
we carefully reviewed the historical shifting patterns and initiated Since a 100% classing requirement would impose significant
an in-depth analysis of the current global cotton market. As a costs on would-be deliverers and other graders would be
result of the research initiatives and discussions, we concluded required for a world contract, we worked with U.S. legislators
that: (i) A contract with multiple origin and delivery points was to pass a bill to modify the U.S. Cotton Futures Act to meet
needed to enhance the market’s ability to price for changes in the needs of the changing marketplace and enable us to list the
the cotton market; and (ii) The World Cotton contract would world cotton contract on ICE Futures U.S.
Continue on p 15

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