By Liu Chang
With the increase of cotton inventory, the cotton market will be oversupplied in the new season. Proper utilization of the hedging function of cotton futures can not only effectively avoid from business risk, but also be helpful for farmers to increase their income.
Due to the influence of the supply and demand situation both at home and abroad, the cotton market price has been in a down turn since this year and the "difficulty in selling cotton" draws attention of insiders.
"It is expected that the cotton yield will reach 6.75 million tons in China in 2012/2013, which falls a few compared with that in the last year. However, taking into account the three factors including comprehensive market yield, sales volume and import volume, the surplus cotton supply may reach 1,089,000 tons," Wei Gaocheng, chairman of Cotton Association of Xinjiang Uygur Autonomous Region, tells the reporter.
It is not difficult to see that with the increase of cotton inventory, the cotton market will be oversupplied in the new season. How do cotton-related companies and farmers cultivating cotton deal with such a situation? In the "2012 Xinjiang Cotton Summit Forum" held recently, the attending experts and a lot of cotton-related companies formed a consensus that profit should be locked in time and business risk should be controlled through proper utilization of the hedging function of futures.
Oversupply affects the cotton price
Faced with the oversupplied market situation this year, the insiders come to a consensus that it should set up complete industrial policy, exert more efforts to support farmers and help the cotton-related companies to avoid from risk by means of the hedging function of futures.
Currently, the state price for cotton purchasing is RMB 20,400 yuan each ton. Zhang Wenmin, general manager of Cotton Industry Business Department of Wonder Futures makes an analysis that the floating range for the upper limit of purchasing quantity by the state is 6 to 7 million tons in 2012/2013, which means there will be a surplus of 3 to 4 million tons for the new cotton yielded after December this year. "The surplus cotton this year can only be sold subject to market fluctuation. It is difficult for the market to 'absorb' the surplus inventory in the years to come and oversupply will directly affect the cotton price," said Zhang.
As for the purchasing price of RMB 20,400 yuan each ton, market participants views generally that such a price seems to be second to none, both higher than the spot and futures price and higher than the deal-making price. Farmers and the cotton-related companies should sell to the state at the purchasing price as the first choice and for the cotton which can not be sold to the state, the cotton-related companies should timely seek a hedge in the futures market.
Cotton futures were listed in Zhengzhou Commodity Exchange in 2004. For the last 8 years, more and more cotton-related companies participated. According to the statistics, up to the end of August this year, 17 million deals were made accumulatively for the cotton futures with the turnover up to RMB 1.72 trillion yuan and the market structure becomes more reasonable increasingly.
Zhang Jing, vice general manager of Zhengzhou Commodity Exchange, says that Zhengzhou Commodity Exchange will continue exerting more efforts to serve the cotton-related companies. "We will increase the times of training in futures knowledge for the cotton-related companies and develop more futures products and service suitable for farmers. For Xinjiang production area, we will open a green channel for warehouse warrant of Xinjiang cotton and take full account of the premium and warehouse layout."
Insiders also give relevant suggestions for how to protect the benefit of farmers cultivating cotton.
Wei Gaocheng says that we hope the state will improve the long-term credit system for cotton purchase and extend the state cotton purchasing period to June. Meanwhile, for the cotton purchased with the credit support from Agricultural Development Bank, he advises to open a green channel and give priority to state purchase and transportation.
Relevant principal in Xinjiang Development and Reform Commission makes a suggestion that the state should give more policy supports to Xinjiang cotton, implement comprehensive direct subsidy policy for cotton and include long stapled cotton into the purchase scope.
Avoiding risks through combination of spot and futures
The cotton-related companies should make full use of futures market to avoid risks, establish the sustained business mode with the combination of spot and futures and achieve the goal of helping farmers to increase their income while locking profits and avoiding risks.
The cotton price fluctuated dramatically in recent two years.
The futures price in Zhengzhou Commodity Exchange has been fluctuating between RMB 12,000 yuan each ton and 16,000 yuan each ton since the cotton futures listed in the market in 2004. However, the cotton yield fell down dramatically due to weather factor in 2010/2011, and the futures price in Zhengzhou Commodity Exchange exceeded the upper limit of the dealing price scope and reached to RMB 33,000 yuan each ton. After that, the price began to drop. It is totally beyond the expectation of most cotton-related companies.
From such a wave of price fluctuation like a "roller coaster", a lot of cotton-related companies are aware of the importance to seek hedge through futures and their approaches in utilizing the futures market are also diversified increasingly.
Hubei Yinfeng Industrial Group Co., Ltd. is in the first batch of companies to enter the cotton futures market. "Before hedging through futures, we usually 'gambled' on the market price and gambled on the market price for the next year on the basis of the market supply and sales situation. For lack of proper hedging tool, such a situation kept for a long time. We were also exploring the right approach when we just started the hedging and even utilized the sales channel of the spot for the futures. If the futures warehouse warrant price was higher, we sold the warrant and if the spot price was higher, we sold the spot," Yan Feng, executive vice general manager of Yinfeng Group.
"Now, we finally explore a reasonable approach." Yanfeng tells the reporter that presently, Yinfeng Group adopts the mode of "cotton farmers + cooperatives + bases + company". "During the sowing period in February and March, we will offer means of production like seeds, pesticide and fertilizer to farmers and discuss and determine the purchasing price, so that we can lock the cost in advance. We will pay a close attention to the futures price from sowing time to cotton harvest time in September. If the price difference is reasonable, we will hedge the futures immediately so as to lock profit. During the purchase time, even if the purchase price is slightly higher than the expected one, we can purchase more cotton than other companies, because hedging has helped us to save the cost."
