1 / 17

A. A further look at the commodity chain

CLASS 2. A. A further look at the commodity chain the production and processing chain - the example of cotton seasonality pricing at different levels of the chain the flow of goods the flow of documents marketing structure, and the role of traders

kamala
Download Presentation

A. A further look at the commodity chain

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CLASS 2 • A. A further look at the commodity chain • the production and processing chain - the example of cotton • seasonality • pricing at different levels of the chain • the flow of goods • the flow of documents • marketing structure, and the role of traders • integrating finance in the commodity chain • B. Dealing with uncertainties

  2. The cotton production and processing chain In developing countries, more than 250 million people depend for all or part of their cash income on cotton production and processing. * “Standard” cotton * Extra-long staples (for high-quality textiles) Seed cotton Hand picking (70%) or machine picking (30%) Farmers Ginnery Cotton seed Cotton fibre Oil mill Produced in “bales”; often transported by container Cotton spinner Textile factory Produced in “rolls”, sold on the basis of length; often, tailor-made to textile factory’s needs Cotton seed oil (world’s 5th major edible oil) Cotton seed cake (world’s 2nd major livestock feed) Cotton yarn

  3. Most commodities are seasonal - e.g., cotton in Uganda Seasons differ from country to country Cotton lint Raw cotton “Exposure” of ginnery J F M A M J J A S O N D

  4. Remember: the pricing environment is not predictable.New York cotton futures, high & low prices (1980-1997)

  5. Exploration Production Transport Processing Marketing/ distribution Information Conditions do not remain the same. E.g., technological factors. Falling production costs; and competition from new products Increasing flexibility of processing equipment Highly competitive pricing. Easier identification of reserves has led to geographical diversification Drastic fall in international shipping costs; bulk transport Just-in-time delivery; electronic trading

  6. Cotton pricing Seed cotton Generally, no “formal” price formation system. Some auctions (e.g., India); and some local price reporting. Farmers Ginnery Textile factory Cotton seed Clothing Cotton fibre Oil mill * Price reporting * US futures market Standard cloths Price reporting Cotton spinner Textile factory Price reporting * Price reporting * Japanese futures market Cotton seed oil Cotton seed cake Cotton yarn

  7. Farmers Illegal futures markets, raw cotton Raw cotton: mostly spot, some forward contracts Ginners Cotton lint: spot, forward contracts (1-3 months) arbitrage Traders Bombay futures market, cotton lint Cotton lint: much use of forward contracts (2-3 months) Cotton lint: forward contracts (up to 6 months) Textile mills Yarn/textiles: forward contracts (up to 6 months) Cotton pricing and marketing - the Indian example Foreign buyers

  8. LIBOR + 2- 10 % Variable Weak Variable Very strong Rare + 50 % or no loans Non-existent Strong Difficult Strong Post-liberalization: risk exposure, financing costs and access to finance Use of price risk management tools Exposure to price risk Credit risk for a lender Interest rate for a loan Access to finance Exporters Cooperative unions or large traders Cooperatives/ small traders Producers

  9. If relevant futures markets exist, physical commodities are often priced on the basis of futures contracts. E.g., coffee: Quantity OriginGradeShipment Destination FuturesPriceBasis DatesMonth BIDS Arabica Washed 3600 bagsIndia Plantation AMar - AprOpenMayLess 19c/lb Fob Robusta Unwashed 1680 bagsCote d'Ivoire Grade 2AprOpenMayLess $100 C&F 3360 bagsCote d'Ivoire Grade 2May-Jun OpenJulLess $100 C&F 3600 bagsIndia Cherry abMar-Apr (1800 each)OpenMayLess $40Fob 1800 bagsIndia Cherry abMayOpenJulLess $40Fob 3600 bagsIndia Cherry clean bulkMar-Apr (1800 each)OpenMayLess $80Fob 1800 bagsIndia Cherry clean bulkMayOpenJulLess $80Fob 3600 bagsIndonesia EK1 gr4 80 defMay&Jun OpenJulLess $230 Fob 1280 bagsUganda Screen 15JunOpenJulLess $20Fob 2560 bagsUganda Screen 15Jul-Aug (1280 each)OpenSepLess $20Fob OFFERS Arabica Washed 3600 bagsIndia Plantation AMar - Apr (1800 each) OpenMayLess 15c/lb Fob

  10. Seller The flow of goods: INCOTERMS Domestic transport EXW Clearing at export port FAS FCA FOB International transport - who pays insurance? CPT/ CFR CIF Clearing at import port CIP DAF Domestic transport Are import duties paid? DES DEQ DDU Buyer DDP

  11. Seller The flow of documents Perhaps need to add customs/consular invoice Invoice Perhaps consular visa needed Certificate of origin Independent verification? Inspection certificate Translated into language of importer? Packing list Bill of lading Insurance certificate Import certification Buyer

  12. Producer The cotton trade Cooperative Private buyers Central marketing co. Broker/ agent Agent Merchant Central buying co. Agent User

  13. Functions of international traders: • Overcome language barriers • Overcome the problems of space: land and sea transportation, logistics, documentation, coverage • Provide financing • Manage currency risks (including to the provision of risk management services) • Take market risks (long/short positions; offtake contracts; supply deals; price guarantee contracts) • Provide direct or indirect access to futures exchanges • Arrange countertrade • Handle quality issues (provide information on quality standards; assist in selection of required qualities and provide quality alternatives; ensure procurement of proper quality) • Provide information to buyers and sellers

  14. Farmer / middleman Integrating finance into the commodity chain Quality? Security of transport? Warehouse / Warehouse receipt issued Bank extends financing on basis of collateral stock value Reprocessing Facilities Risk of loss of control over collateral Graded Commodity Export warehouses - finance relatively easy. Bank extends financing on basis of collateral stock value Warehouse receipt issued Export Export proceeds are remitted to designated escrow account Are there well-established buyers? Financing secured through export receivables

  15. Integrating finance into the commodity chain (2)

  16. Can local traders still compete in the face of high financing costs? - the example of Uganda Licensed exporters: end of 1996: 200 early 1999: 25 Interest rates charged on funds used by coffee exporters, 1997 Interest rate Percentage charged of exporters 10 % or below 30.0 % 10.1-15 % 6.6 % 15.1-20 % 20.0 % 20.1-25 % 26.6 % 25.1-30% 16.6 % Foreign companies; market share close to 60% Local companies; also face problems with timing of availability of funds (delays), and heavy bureaucratic load. Source: Frederick Kawuma, Managing Director, Uganda Coffee Trade Federation

  17. Dealing with the uncertainties of physical trade • Commodity trade and production are exposed to a large number of risks, not just price risk. The proper management of price risk assumes a proper understanding of other risks such as: • Counterparty risk: what will happen with my hedge if my counterparty defaults? • Timing risk: will the hedge still be good if there is a delay in shipment? • Quantity risk: how do I do to hedge uncertain production/supply • Competition risk: how do I avoid that competitors take my market away?

More Related