This article highlights some differences between U.S. cotton and other ag commodity markets. The subject really involves the nexus of politics and economics. There is a long history of government regulation of commodity markets. A textbook example is the Onion Futures Act of 1958 which banned trading of onion futures (and which was the basis for subsequent studies of efficient markets by Working[i] and Gray[ii]).
Our cotton example begins in 1929 when the U.S. Congress singled out cotton in a notable policy restriction. It seems that two years earlier, one of USDA’s routine monthly forecasts had projected lower cotton prices. When this forecast proved accurate, some in the cotton industry assumed that the forecast caused the price decline. This led to a political reaction where the USDA was banned from forecasting (only) cotton prices, a policy that remained in place until the 2008 Farm Bill.
Cotton was unique in dropping out of Title 1 commodity programs in the 2014 Farm Bill, only to come back in 2018 with “seed cotton” as a new, covered commodity in the Bipartisan Budget Act of 2018. Space does not allow an adequate discussion of the underlying events of that story.
A unique reporting requirement of U.S. cotton since the 1950s is the CFTC Cotton On-Call report (https://www.cftc.gov/MarketReports/CottonOnCall/index.htm ). This is a weekly report of merchant on-call (i.e., basis contract) transactions reflecting purchases from farmers and sales to textile mills that are unfixed with ICE futures, presented by delivery month. These data are potentially informative in identifying large, hedged positions in ICE cotton futures (see the peaks of the red line in Figure 1). This market transparency could benefit suppliers and smaller merchandisers and market analysts, but in some cases it could lead to speculative trading on anticipated short covering prior to futures contract expiration (https://southernagtoday.org/2021/12/current-squeeze-dynamics-in-ice-cotton-futures/ ).
Why have these different policies existed for cotton? One reason is the historical dominance of southern politicians during the 20th century. Thus, if the cotton grower segment was angry at USDA, even mistakenly, they had the political power to have something done about it for a southern crop like cotton. The global aspect of cotton is another feature that brought about the trade talk attention, the Doha Round, and the WTO case, which precipitated cotton leaving and returning to federal farm programs. Finally, some cotton-specific regulations may have to do with the concentration of the cotton merchandising sector, relative to grains. Compared to grains, the U.S. cotton market is dominated by a handful of global merchandising firms. The cotton on-call reporting requirement originated as a way for the cotton merchant sector to report their futures transactions as legitimate hedges, which they are. Curiously, it is the cotton merchant sector that now opposes the collection and publication of the cotton on-call data, which they consider proprietary (https://acsa-cotton.org/wp-content/uploads/2020/05/ACSA-Position-Limits-Comment-Letter.pdf). The merchant sector also has had an ongoing concern since 2008 with excess speculation in ICE cotton futures. This may explain their opposition to publication of cotton on-call data.
[i] Working, Holbrook (1960-02). “Price Effects of Futures Trading.” Reprinted from Food Research Institute Studies, Vol. 1, No. 1, February 1960, in Selected Writings of Holbrook Working, Anne E. Peck, ed., Chicago Board of Trade, 1977. pp. 45–71.
[ii] Gray, Roger. 1963. “Onion Revisited.” Journal of Farm Economics,. Vol. 45, No. 2, May 1963.
Robinson, John. “Some Quirky Aspects of Cotton Marketing“. Southern Ag Today 2(27.1). June 27, 2022. Permalink
