The only constant is change--a saying that has never seemed more true than over the past few years in the global cotton market. Whether it’s Chinese government policies on stocking/de-stocking, the imposition and unwinding of tariffs, WTO challenges to programs designed to support domestic growers, gyrations in key currencies and in energy and fertilizer prices, or changing consumer preferences for different fibers and attributes, the challenges facing cotton producers, merchants, mills and end users have never seemed larger or more impactful.
Challenges also bring opportunities which can help businesses strengthen their financial and competitive position. Making the most of opportunities requires careful planning, thoughtful investment of time and financial resources, and use of the correct tools. The ICE Futures U.S. Cotton No. 2® futures and options contracts are two of the tools that can help the cotton industry grow even in challenging times.
The two core functions of the No. 2 contract have not changed over the almost 150-year life of the futures contract: Price Discovery and Price Risk Management. The No. 2 futures contract provides the single best benchmark of the market consensus value of a pound of cotton, for delivery in the near term and three years out into the future.
The ICE Cotton No. 2® futures contract price is derived in an open, regulated, transparent trading platform with minimal barriers to entry. Bid, Ask and Trade prices for nearby and distant expiry months are published instantly and in real-time, accessible to any market observer anywhere in the world - ICE can even deliver prices to a cell phone. ICE cotton prices can then be used to help drive business decisions for cotton producers, merchandizers, mills or finished product sellers.
In addition to discovering the current absolute price of cotton, the ICE No. 2 options contract prices also provide the best-available market consensus on expectations for future volatility in prices, via analysis of the implied volatility levels generated by current futures trades.
The ICE No. 2 futures and option contracts allow market participants to manage the cotton price risk they face in producing, trading or using cotton fiber, by taking a position in the futures and option contracts. Unlike swaps or other non-exchange-traded tools available, trading on ICE is backed by the financial safeguards of a central clearing house that eliminates the counterparty risk inherent in a private, bilateral agreement.
Using these tools requires a thorough understanding of the futures and options contract terms. There are key differences between futures and options that can make one or the other more suitable for a particular market participant, including the proper analysis of a firm’s commercial market position, financial position, risk profile and risk tolerance, and the ability to strategize the best possible use of the contracts to manage cotton price risk.
Instead of trying to fight the idea that change is a constant, see change as an opportunity - and invest in learning about the right tools to capitalize on that opportunity: ICE Cotton No. 2 futures and options.
