Reports CTRM for Agricultural and Soft Commodities | Page 21

CTRM for Ags & Softs
be confused with futures contracts. The cash price for the cotton is the current local price for the specific product to be
transferred.
In the cotton futures market, participants buy and sell a price for a standard grade of cotton. The futures transaction
centers around trading a futures contract based on physical cotton (or its cash equivalent) at a price determined in an
open auction – the futures market. The futures price is the price one expects to pay, or receive, for cotton at some future
date.

“As commodity price discovery and
supply
chain
networks
become
increasingly commoditised, performance
is the last bastion for business owners to
differentiate
themselves
from
the
competition. Today, it is not who you
know but what you know. Better
processes and data management and
analytics will get you there. That is what
we promise and deliver to our clients.”
Richard Williamson – Generation10

The futures contract is a standardized legal commitment to deliver or
receive a specific quantity and grade of a commodity or its cash
equivalent on a specified date and a specified delivery point. The
standardization of the contract allows market participants to focus on
the price and the choice of contract month.
Traders in the cotton futures market are primarily interested in risk
management (hedging) or speculation, rather than the physical
exchange of actual cotton. Although delivery of physical cotton can
take place under the terms of the futures contract, few contracts
actually lead to delivery. Instead, purchases of contracts are usually
matched by offsetting sales and vice versa before the contract expires,
and no physical delivery takes place.In addition to its pricing functions,
the cotton futures market helps to support standards of quality and
grade that can be applied throughout the industry.

The Cotton Supply Chain
Cotton is an annual field crop grown across a wide variety of regions of the world with the largest areas of production
being China, USA, CIS, West Africa and Brazil. It is produced all year round from both hemispheres, and each area of
origination has its peculiarities to deal with, but the USA has the most stringent rules, export requirements and quality
attributes making it the most complex set of CTRM software requirements for cotton. Various quality attributes and weight
are important, impacting price that can be measured and tracked at the level of an individual bale. Those quality attributes
and weight can also change during the life of the bale, which is tracked from the point of origin to point of consumption
with many ‘touch’ points along the way.
The Cotton plant generally requires large amounts of sunshine to prosper, but it is also quite prone to insect infestations
and damage, and it is also quite a capital-intensive field crop.It is harvested either by hand or machine, and countries like
China, India and those in West Africa still rely heavily on hand picking, whereas other countries like the United States and
Australia are mostly machine harvested. The two methods of machine harvesting are by spindle or stripper.
Cotton is often stored in ‘modules’ that allow the cotton to be stored without losing yield or quality prior to ginning.
Specially designed trucks pick up modules of seed cotton from the field and move them to the gin. Modern gins place the
modules in front of machines called module feeders that then literally break the modules apart and “feed” the seed cotton
into the gin. Other gins use powerful pipes to suck the cotton into the gin building. Once in the cotton gin, the seed cotton
moves through dryers and through cleaning machines to remove gin waste such as burs, dirt, stems and leaf material
from the cotton. Then it goes to the gin stand where circular saws with
small, sharp teeth pluck the fiber from the seed.
From the gin, the fiber and the seed go their different ways. The ginned
fiber, now called lint, is pressed together and made into dense bales
each weighing about 500 pounds. To determine the value of the
cotton, samples are taken from each bale and classed according to
fiber length (staple), strength, micronaire, color and cleanness (see
below for more details). Producers usually sell their cotton to a local
buyer or merchant who, in turn, sells it to a textile mill.
© Commodity Technology Advisory LLC, 2016, All Right Reserved

“I've always felt O for Operations should
be part of the CTRM acronym, especially
in Agriculture and Soft commodities.”
Richard Williamson – Generation10

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