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On october 3rd, the day began with a seminar hosted by the French and African Cotton Associations. Debates were chaired by the presidents of the two associations, Mr Franck NIEDERGANG and Baba BERTHE.
The speakers were Mr François FAURE of BNP Paribas, Mr Michael EDWARDS of Cotton Outlook and Mr Boubacar BA of CMDT.
During the dinner, the name of the person who had guessed the closing price for the DEC contract was revealed. This yera the winner was Mr Denis NASSARAH of Nasa Trading. He received an ST DUPONT fountain pen.
The president of AFCOT and the board of directors would like to thank all the three presenters and all those who took part in the day and made it a success.
Mr Franck NIEDERGANG, president French Cotton Association
Speech of October 3rd, 2017
Ladies and Gentlemen,
It’s always a pleasure every year to see so many of you at our traditional AFCOT dinner. There are over 330 of us here tonight, representing some thirty different countries.
On behalf of the AFCOT Management Committee, I would like to thank you for honouring us with your presence at this dinner and our meetings, with some of you travelling long distances. I would like to welcome my counterparts from cotton associations as well as our guests of honour, who were introduced by AFCOT Vice-Chairman Curt ARBENZ.
I would particularly like to welcome the delegations from producer countries. We are sending you our full support on the eve of this new season and ask you to take our words of encouragement to the cotton growers you represent. My thanks go to François FAURE from the bank BNP Paribas, Michael EDWARDS from Cotton Outlook and Ousmane TRAORE from the CMDT for their brilliant presentations during our seminar this morning.
I would like to thank Baba BERTHE, Chairman of the African Cotton Association, our sister organization, for helping me moderate the presentations and more importantly for honouring us with your presence tonight.
Finally, and because some of you may be wondering why we’ve swopped a mild early autumn in Barcelona for Normandy, I would like to take this opportunity to pay a warm tribute to my predecessor, Georges TOBY. In choosing Barcelona to host us last year, Georges set the bar very high in more ways than one. Thank you, Georges, for your hard work and unfailing determination during your time at the head of our association.
A year after our last meeting in Barcelona, as the result of the earlier competition on futures market prices shows, the difference in the market seems minimal from one year to the next. Is the cotton market now plain sailing? Has nothing happened this year? The year has had its fair share of major events but it’s true: the market remains at quite comfortable levels.
The wheel turns in the cotton sector, and sometimes very quickly. We know that quieter or more stable periods help all our businesses, teams and associations continue their tireless work improving our protocols, investing in research, information and training, reassessing the risks we face and preparing for an uncertain future.
If we are to offer our members a reliable tool, the European Cotton Regulations must adapt to the realities of our industry. And so I’m proud to announce that the AFCOT Management Committee, assisted by legal experts, is adding the final touches to an arbitration procedure for “minor” disputes.
With that procedure, you will have access to a simplified arbitration service resolving commercial disputes involving less than 100,000 euros. A sole arbitrator will be appointed versus three currently. It aims to shorten the procedure time — a maximum of four months — and cut costs by using just one arbitrator.
Simplified arbitration for disputes of up to 100,000 euros is what our industry needs. Many parties regularly face the dilemma of having to abandon outstanding debts because of the overly long procedures and significant resources needed for their recovery.
Before moving onto the traditional step of presenting an overall picture of the cotton market over the past year, I would like to share some observations on a fundamental shift in our business recently.
I started my cotton activities in West and Central Africa twenty or so years ago on behalf of a major trader that, like others, withdrew from the cotton trade following the 2008 crisis.
At that time, the West and Central Africa region saw its cotton production increase regularly to stabilize at around 950,000 tonnes in 1997/1998. Exporters had barely started to expand into the international trade after a long history of near-exclusivity with companies that have since been radically restructured or folded.
The key to success was obvious: spending time in the field with our African partners, learning and understanding both the field and our suppliers’ demands. That enabled us to “take the market to them” via competitive offerings and services. The keyword was communication. Constant.
And that has easily been the biggest change over the last twenty years or so: the increase in our ways and means of communicating. Today we all have at least one or two smartphones. I know that some people here have many more! And they’re with us at every minute of the day. A digital ball and chain!
The incredible development in communication enables players to oversee and contribute to business activities whilst hardly ever being in the field, for example. Although that is largely made possible by producers’ and exporters’ professionalism in executing the contracts.
The simplification in long-distance communications, which is making our planet smaller, has gradually increased the counterparties, and to facilitate the management much of West and Central Africa’s fibre is marketed via calls for tender.
The call for tender system aims to stimulate competition. More importantly, it has the huge advantage of creating transparency and so simplifying the decisionmaking process. The best price at the right time. Unfortunately, communication and experience are often excluded from this system and yet they are essential. To be a truly effective instrument, the call for tender system must be joined by two essential measures. Increasing the direct communication between parties and carefully selecting our counterparties.
Over the last ten years, cotton prices have varied between a low of 40 cents/lb in 2008 and a high of 220 cents/lb in 2011. Production in the West and Central Africa region has also been very volatile, varying between around 500,000 tonnes and 1,300,000 tonnes in line with fluctuations in the futures market and movements in the euro/US dollar.
It’s vital to remember that we are stakeholders in a market that can be extremely volatile. It involves significant risks, particularly those linked to our counterparties’ performance.
Those risks are exacerbated by an environment where contracts are concluded months before their execution and the fact that it’s often much easier to access the product (FOB purchases CAD payments) in West and Central Africa than in many other exporting countries around the world. The risk is the increase in counterparties whose performance could falter in the event of problems.
In some way that’s the price of success. As the prices show, and especially the bases paid for cottons from West and Central Africa in the last two years, these cottons are high quality, desirable and recognized as such by the global spinning market. That market is at this very moment buying African cotton at higher prices than so-called contamination-free cotton such as US cotton. Incidentally, some of us have been receiving complaints about contaminated US cotton from spinners for months.
So we should constantly keep in mind the question: is my client able to meet its commitments if the market turns or will it turn its back on me? Some of us here will have had that unpleasant experience. Although the market has spared us that kind of situation for some time, that doesn’t mean that we can overlook the risk. The punishment would be too severe.
We’re at the start of a new cotton year with the official statistics forecasting very large productions in many parts of the world. Of course, that could affect the prices and so we should keep a close eye on our counterparties and the execution of our contracts. A good deal is when payment for the goods reaches our bank account, not just when the purchase or sale are confirmed. That naturally leads me to the market picture since our dinner last year. We’ve seen cotton production increase regularly in recent years. According to USDA figures from the start of September 2017, this year is continuing in that vein with global production forecast at 26.3 million tonnes for 2017/2018. For the United States of America, for example, the USDA forecasts the biggest production since the 2005/06 season. Remember that the US was at that time still using the step 2 subsidy system, which encouraged production and exports. Returning to such production levels is significant. How did we get here?
Cotton prices have been sustained this year and even approached 87 cents per lb in July. The low price of speculations that compete with cotton, such as soy and maize, the continued success of sales from China’s state reserve and speculators’ unprecedented involvement in the cotton futures market during the year have helped keep prices at relatively high levels and so maintained producers’ enthusiasm for cotton growing.
According to the USDA figures for September, anticipation of large harvests is also contributing to lifting the stocks versus consumption ratio to 59.5% when it has been falling consistently for years. These figures are set to change, however, when the damage caused by the recent Hurricanes Harvey and Irma is fully considered.
This year has been full of defining events for cotton prices. Here are three examples: The first was India’s Prime Minister Modi appearing on television on 8 November 2016 to announce without warning the withdrawal of 500- and 1,000-rupee banknotes at midnight that same day. It was a bolt from the blue. According to the government, the announcement aimed to tackle the shadow economy and financing of illegal activities and terrorism.
The sudden nature of the announcement and rapid removal of large amounts of cash from circulation caused huge disruption across the country’s economy: stock market crash, queues outside banks to exchange the now invalid banknotes, etc. It coincided with the start of the cotton year in India, and as many of the transactions between cotton producers and ginners involve cash, the availability of newly harvest cotton was significantly delayed.
Given the situation, both Indian spinners and many other countries that regularly use Indian fibre were forced to meet their needs from other sources. Our exporter or freight forwarder friends here have undoubtedly noticed the huge rise in shipments to India and neighbouring countries this year. Our trader friends will be able to confirm the surge in bases for the frequent shipments that the situation generated, and we’re still feeling its effects.
To take the example of the US again, the export statistics at the end of 2016/2017 show that it exported 4.2 times more cotton to India than in the previous year, 2.6 times more to Bangladesh and 2.3 times more to Pakistan. Another notable fact for this cotton year has been the continued reduction in China’s stockpiles. After several unsuccessful attempts to find the right formula, we’ve seen destocking in earnest since 2016. 2.7 million tonnes were sold from May to September 2016 and the process has continued in the same vein this year from early May to late September.
Now that China seems to have the reduction in its strategic stock under control, the rumours and questions are growing as to the timing of its return to the imports market in volume. There is some consensus in the market on China’s stock target. It’s around 4 million tonnes.
If local consumption and destocking continue at the current pace in the year ahead, an increase in Chinese import demands is fast approaching. As for the scale of its demands, remember that before China started to reduce its imports in 2015 and 2016 to around 1 million tonnes annually, they easily reached over 3 million tonnes annually.
When the monster’s appetite returns, the market will aim to create the right price conditions so that production can feed the monster…
Finally, the third defining event that I want to share with you is speculators’ extraordinary positioning on the cotton futures market this year. They have accumulated long positions at unprecedented levels. To give you an indication, the volume of cumulative open positions has comfortably beaten the previous record set during the events of 2010/2011.
These same speculators were also positioned on the futures markets of other agricultural commodities. And so it has more to do with an overall strategy to hold agricultural raw materials as coverage against the risks of inflation than the cotton itself. But the effects on prices are palpable. Speculative positions have actively contributed to the upward trend that continued until mid-June and moreover to the year’s highest prices at 87.18 cents per lb, which was reached on 15 May.
You have been very patient with me and I thank you for that. I’m not going to stop you enjoying your dessert and the rest of the evening for much longer. I know, I said that I would only give three examples of defining events in this speech. But there’s another one that probably means more to us here tonight. It’s quite extraordinary and I can’t not mention it.
I’m referring to the spectacular reversal of fortunes that we’ve seen this year in Burkina Faso’s production quality. For years when it came to cotton from Burkina Faso, unfortunately the discussions turned too often to short staples, declining values, etc.
Given the production quality that the “Land of the Just” has brought us this year, some credit is long overdue. That success will go down in the history of cotton production and it owes nothing to chance.
A huge well done to those who made it happen. Your pugnacity and success deserves respect, and your presence here tonight honours us. This well done extends of course to all your staff and the country’s cotton growers, who once again have showed the world their professionalism and commitment. What you have accomplished is exemplary.
To finish, I would like to offer my sincere thanks to Brigitte Houllier, AFCOT treasurer, and to Gérard Kassarian, our secretary, for their unfailing support with the smooth running of our association. Also to my colleagues and friends from the Management Committee, who I’m always pleased to see at our meetings.
I wish you every success in this new cotton year and will be delighted to see you in Monte Carlo on 4 and 5 October 2018 for the French Cotton Association’s 128th dinner.