Futures standards now higher

Delivery specifications on New York futures contract, beginning with the May 2003 contract, have changed.

The changes are significant in that they raise the minimum quality standards for certifying cotton on the futures market. It also discounts delivery of old growth cotton. These are designed to remove negative quality factors that can overhang a market and stymie trading.

Trading was delayed due on that contract until June 5 awaiting approval changes by the changes by the Commodity Futures Trading Commission (CFTC). The changes will be in effect for all newly listed futures contracts months.

The delivery specifications changes from the New York Cotton Exchange are:

  • Increase the minimum strength requirement to 25 grams per tex.

  • Establish “old crop” price differentials.

  • Clarify the definition of a “warehouse bale tag coupon.”

  • If at some future date USDA “shall commence quoting price differentials for cotton having a micronaire level of 4.8 or 4.9, allow for corresponding price differentials for such cotton under the futures contract.”

The delivery specifications changes were made to address concerns that low-quality cotton could be delivered against futures because standards did not account for brittleness and other undesirable quality traits.

The regulations also carry penalties to help force old cotton out of the delivery process. Large certificated stocks have been partially blamed for much of the current price weakness.

Strength requirement

The minimum strength requirement for Exchange deliveries is raised to 25 grams per tex (gpt), from the current 22 gpt, effective with the May 2003 delivery. Existing stocks of certificated cotton with a gpt reading below 25 will no longer be deliverable after the March 2003 delivery. Currently approximately 10 percent of certificated stocks have a gpt reading of less than 25; prior to Jan. 1, 2002, the Exchange will begin to disclose regularly the number of bales in certificated stock with a gpt of less than 25.

Age-of-bale discount or penalty will apply to all cotton delivered in a calendar year that is two or more years later than the cotton's year of growth (defined as the marketing season during which the cotton was grown).

Cotton delivered in the second calendar year after its year of growth shall carry a two-cent per pound penalty; an additional two cents per pound penalty will apply for each additional calendar year after the second. For example, cotton grown in the 2002-2003 marketing year would accrue a two-cent per pound penalty beginning on Jan. 1, 2004; a four-cent per pound penalty beginning on Jan. 1, 2005; and a six-cent per pound penalty beginning on Jan. 1, 2006, etc.

The new age penalty will apply to all deliveries beginning with the May 2003 delivery. This means that cotton grown in the current 2001-2002 season that is delivered against the May 2003 contract will carry a two-cent per pound age-of-bale penalty; cottons delivered against the May 2003 contract that were grown in the 2000-2001 season will carry a four-cent per pound penalty.

There will be a new commercial difference for cotton in Exchange deliveries which have a micronaire reading of 4.8 to 4.9, if such a difference is calculated by USDA. If no such difference is calculated by USDA, the difference for Exchange deliveries shall be zero. This new commercial difference for 4.8 and 4.9 micronaire cottons will apply to all deliveries commencing with the May 2003 delivery.

Changes in the definition of a Warehouse Bale Tag Coupon are that by specifying that an Official Warehouse Bale Tag Coupon must be one that is issued by the warehouse. This definition becomes effective with the May 2003 delivery.

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