Physical Traders: Introduction to physical cotton trade

Physical trade cotton

Cotton ready for shipment, 1911

Over 70% of world cotton crop is being produced in countries as China, the U.S., India, Pakistan and Central Asia. Cotton is consumed all over the world, with annual consumption running from over 50 million bales in China to as little as 1000 bales (Armenia and Nicaragua).The largest consumers are China, India, Pakistan, Turkey, the U.S. and Brazil. Majority of the world’s cotton consumption takes place in countries where cotton is also produced. This development has turned former large cotton exporters like China, Mexico, Turkey, India and Pakistan into net importers of the commodity. Quality needs also affect the world trade. In India or Pakistan the textile industry supplies yarn, fabric and apparel to Asia, Europe and U.S. To provide top quality textile products for exports,
local mills relly on imports of U.S. and Australian cotton, which have a very low rate of contamination (what exemplifies a better grade).On the other hand Pakistan and India continue to trade some of their lower grade with less demanding Asian business partners.It is worth of remark that physical cotton trade is not exactly free. One can not sell Chinese cotton to Chinese mills since its goverment affiliates business. Similar situation applies to India. Nonetheless it is possible to freely trade cotton from China and India worldwide, when we come from outside of these countries. Physical cotton traders connect farmers and textile mills, taking a role of a market maker. Being able to buy when farmers are keen to sell, and being able to sell while textile mills are in need to buy. This role is of no small importance. It has much less to do with a speculation, as a general opinion goes. Buying low and selling high. It is basicly a seller market, and a commodity is being bought at the highest price of the day from a producer, and sold at the lowest. Not more than 10 companies worldwide can be considered as leading physical traders. They trade in millions of bales. However there are also family companies on the market, with strong business traditions. Added value physical traders bring into cotton trade is also based on  their ability to buy all quantity produced, buying total quantity harvested on the contracted acres, ability to deliver minimum price guarantee contracts, forward contracting, ability to speak producer language (which is not a small matter by the way), financing and foreign exchange. On the receiving side, added benefits for spinning mills encompass: supplying cotton according to the exact specs, delivering exact quantities,  storing large stocks of physical cotton, selling on forward up to 2 years ahead, maximum price guarantee contracts, providing credit terms with payment, selling with rejection clause, or selection of actual samples, delivering “just-in-time” on the exact requested date/time.

Producers and mills must be able to rely completely on the merchant’s guarantee of performance, in spite of market conditions. With today’s high volatility in prices, this is very important. From this guarantee of performance an importance of trader’s reputation can be directly derived.

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