The quality bar has been raised on delivery specifications on New York cotton futures contracts, hopefully to stimulate trading…and maybe provide a catalyst to shove spot prices from current and unprecedented depths of less than 40 cents per pound.
According to Jarral Neeper, assistant vice president of economics and call pool operations for Calcot, Ltd., Bakersfield, Calif. the changes “will not make cotton worth any more but it is going to keep undesirable cotton from becoming a burden on the board. Overall, we think these changes will be good for the producer and the end user.”
These changes have been negotiated over the past year and a half.
Growers, however, are concerned that at least one of the changes — narrowing the premium micronaire range on delivery specifications — may have a negative impact on the future Commodity Credit Corp. loan rates. They have formally lodged their objections.
The controversial change establishes a new commercial difference for cotton certificated for delivery on the New York Board of Trade, cotton which has a micronaire reading of 4.8 to 4.9…if such a difference is calculated by USDA.
The American Cotton Producers, Calcot and others objected to this narrowing of the premium micronaire range, fearful it would eventually lead to new CCC loan discounts. Currently, there is no such difference calculated by USDA and futures delivery standards will not reflect it unless USDA starts calculating it. This proviso was the key change recommended by Calcot and the other grower groups.
The new delivery specifications on New York futures contract begin with the May 2003 contract.
Perhaps the biggest change is in the minimum strength requirements for cotton to be certificated. With that 2003 contract, the minimum goes from 22 grams to 25 grams per tex.
“Right now, there is a lot of low strength cotton on the board,” said Neeper. “People have looked at the board as a dumping ground for high grade, low strength cotton. Strength is not being discounted on the board, but it is in the country. You cannot give away 23 or 24 cotton today.” Neeper called the new 25 grams per tex minimum a “compromise.”
Existing stocks of certificated cotton with a grams per tex reading below 25 will no longer be deliverable after the March 2003 delivery date. Currently, about 10 percent of certificated stocks have a gpt reading of less than 25; prior to Jan. 1, 2002, the Exchange will begin to disclose regularly the number of bales in certificated stock with a gpt of less than 25.
Another factor over-hanging the market has been old growth cotton. Large certificated stocks have been partially blamed for much of the current price weakness.
“For years, older cotton sits on the board and collects weight,” said Neeper. “To get around those weights, this cotton is often de-certified and re-certified as brand new bales of cotton without penalties. The same cotton can stay on the board to infinity.”
It can still continue to sit on the board, but it becomes increasingly less valuable under the new rules.
Age-of-bale discount or penalty will apply to all cotton delivered in a calendar year that is two or more years later than the cotton's year of growth. This is defined as the marketing season during which the cotton was grown.
Cotton delivered in the second calendar year after its year of growth shall carry a two-cent per pound penalty; an additional two cents per pound penalty will apply for each additional calendar year after the second. For example, cotton grown in the 2002-2003 marketing year would accrue a two-cent per pound penalty beginning on Jan. 1, 2004; a four-cent per pound penalty beginning on Jan. 1, 2005; and a six-cent per pound penalty beginning on Jan. 1, 2006, etc.
The new age penalty will apply to all deliveries beginning with the May 2003 delivery. This means that cotton grown in the current 2001-2002 season that is delivered against the May 2003 contract will carry a two-cent per pound age-of-bale penalty; cottons delivered against the May 2003 contract that were grown in the 2000-2001 season will carry a four-cent per pound penalty.
These discounts will hopefully force old cotton off the board.
Trading was delayed on the May 2003 contract until June 5 awaiting approval changes by the changes by the Commodity Futures Trading Commission (CFTC). The changes will be in effect for all newly listed futures contracts months.
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