Barbara Meredith USDA, AMS, Cotton Program Chief, Market News Branch Spot Cotton Quotations: How They Are Established and the Challenges Faced By USDA, AMS Barbara Meredith USDA, AMS, Cotton Program Chief, Market News Branch

How Spot Quotations are established Legislation and Regulations Process Challenges in establishing Spot Cotton Quotations

Legislation and Regulations The U.S. Cotton Futures Act (7 U.S.C. 15b) Requires that the U.S. Department of Agriculture establish bona fide spot markets and report commercial differences to be used for settlement of New York Cotton Futures contacts USDA, AMS fulfills the requirements of the act by publishing the Daily Spot Cotton Quotations.

Legislation and Regulations The Code Federal Regulations (CFR) [Title 7 part 27—Cotton Classification Under Cotton Futures Legislation] Defines the bona fide markets Establish which markets are to be used for settlement cotton futures contracts Define the qualities that are to be quoted Provides general guidelines for establishing the quotations

Daily Spot Cotton Quotations Represent the approximate market value of various qualities of cotton sold in local markets Can be defined as the cash price for cotton in a local market Quotations include a price and basis for base quality and differences (premiums and discounts) for all other qualities

Daily Spot Cotton Quotations Spot Quotation Terms Spot quotations and differences are for cotton equal to the official standards, net weight, in mixed lots Upland quotations are FOB car/truck which includes compression and any brokerage charges

Daily Spot Cotton Quotations Spot cotton sales include, but are not limited to: Producer sales Merchant-to-merchant trading Sales to mills Cooperative sales to merchants or mills Are not limited to the current crop year’s production

Daily Spot Cotton Quotations To cover all growth areas there are Seven Spot Markets Southeast North Delta South Delta East Texas/Oklahoma West Texas Desert Southwest San Joaquin Valley

Daily Spot Cotton Quotations United States Average Simple average of differences in each market that quotes the quality Each market carries same weight

Qualities that are Quoted Tenderable Qualities Deliverable on Futures Contracts are quoted in all markets Non-deliverable qualities in markets where those qualities are normally produced or traded

Qualities that are Quoted

Establishing Quotations Area Market Reporters contact buyers and sellers daily either by personal visit, telephone or fax Ask about spot sales and or purchases Receive Re-Caps from buyers and sellers Have access to The Seam Compare re-cap prices to previous day’s spot quotations Prices reported in local terms are adjusted to quotation terms

Establishing Quotations Recaps are combined with others for the reporter to analyze

Establishing Quotations Summaries and recommendations for changes to basis and or difference are submitted to branch management After reviewing and talking to the reporter, the recommendations are approved, disapproved or modified

Establishing Quotations When there is limited trading Prices for qualities that did trade are used in determining quotations for these qualities that were not reported When there is no trading, Quotations can be determined by: bona fide bids and offers Sales of hedged cotton, Other sales of cotton (sale of CCC Loan Equities), Changes in the price of the futures contract

Challenges Volume of Spot Sales Reported Qualities that are quoted in each market do not represent the quality of cotton currently being produced in the regions US Average does not accurately represent the average spot quotation value

Volume of Spot Sales Reported

Volume of Spot Sales Reported Working to increase buyer and seller participation Working to increase awareness of importance of participation Working with buyers to determine best ways to use non-spot transactions when there is no spot cotton trading

Quality of Cotton Quoted Qualities quoted do not represent quality of cotton currently being produced in the regions Increase in higher color grades and longer staple lengths Decrease in the percentage of shorter staple lengths (staple 31 and lower) Especially in the East Texas-Oklahoma and West Texas Markets

Quality of Cotton Quoted

Quality of Cotton Quoted

Quality of Cotton Quoted Evaluating quality results in order to determine which non-deliverable qualities should be quoted Area Reporters working with their contacts to determine price relationships between qualities that are more prevalent and those that are rarely traded

US Average Simple average of differences in each market that quotes the quality Each market carries same weight 14.29% for qualities quoted in all markets US average does not reflect production distribution

US Average

US Average Added weighted US average to the Monthly Cotton Price Statistics Report Market year to date report Based on previous crop year's production by spot market USDA, NASS final production data Evaluation possible inclusion of weighted average in Daily Spot Cotton Quotations

Reports are on the web at: Comments and suggestions for improving the Daily Spot Cotton Quotations and all of our reports are encourage Reports are on the web at: www. ams. usda.gov/cotton/mncs