24. May 2018 / CIF Bremen: Adjustments Increase Utility Value

Interview with Axel Trede, Chairman of the Committee for Price Quotations:

Since the Bremen Cotton Futures Market closed in 1971, the Bremen Cotton Exchange has been publishing a price index for cotton that is delivered in Germany and Europe. By April 2003 the quotations were changed to CIF Bremen, and it is published under this name since then.  As of 30 May 2018, some parameters of the CIF Bremen will be adjusted. This prompted the Cotton Report editors to speak with Axel Trede, Chairman of the Committee for Standards, for the Determination of Value Differences and Price Quotations at the Bremen Cotton Exchange, about the index and its significance. Axel Trede is a cotton trader and Managing Director of Cotton Service International, as well as a board member of the Bremen Cotton Exchange.

Bremen Cotton Report: How is the CIF Bremen index determined?

Axel Trede: It is a price index which represents the daily value of cotton on the basis of CIF Bremen/North Continent. It is formed from the simple average of the five most favourable quotes from different countries of origin for a defined average quality (up to now USDA Strict Middling with a fibre length of 1.3/32 inch). A commission of people actively involved in the cotton trade or quality management evaluate the anonymously obtained price information and determine a market value that should evenly reflect the supply/demand price level. Only qualities and countries of origin available for immediate delivery or shipment are considered.

What is the function of CIF Bremen for users of cotton?

The price index is a service of the Bremen Cotton Exchange. It is available free of charge and offers interested parties, i.e. producers, ginners, traders, yarn and textile manufacturers, as well as accompanying service providers such as insurance companies, banks, freight forwarders and shipping companies an independent and up-to-date guideline concerning the development of cotton prices. It also gives neutral indications for replacement coverage values, which is of particular importance in the event of damage or technical arbitrage. Since cotton is a listed product, significant price fluctuations can occur within a short time.

What is special about the CIF Bremen compared to other price indices such as Cotlook A or the New York Futures?

The CIF Bremen index focuses on the European market, while the Cotlook A is based on quotes CFR Far East. The Bremen index has only immediately available qualities in its portfolio, while the Cotlook A also considers countries of origin which under certain circumstances may only provide cotton in a few months. The quoted qualities differ only marginally. The New York Futures quotations, on the other hand, primarily reflect only the supply and demand situation respectively the crop state in the United States. This may differ significantly from the situation in the “rest of the world”. Many countries also publish regional indices for prompt merchandise which, above all, reflect local conditions.

On 30 May, the Commission is adding new qualities to its quotes. What are the reasons for the planned adjustments?

Basically, two innovations or additions are being introduced in order to increase the utility value of the index and to adapt it to market conditions.

Firstly, three different qualities per country of origin will be queried and published in the future. These correspond roughly to the traditional use of yarn manufacturers: Strict Middling 1.1/8” for ring-combed cotton yarn, Middling 1.3/32” for carded use and a Strict Low Middling 1.1/16”-1.3/32” for use in open-end spinning. There is thus the possibility for the Commission to illustrate certain crop or quality availabilities. For example, if there are crop problems in certain countries leading to a shortage of high-grade cotton and greater availability of lower grades, then the differences can be adjusted for corresponding qualities. Therefore, a premium can be given for better qualities or a higher discount for lower grades.
Secondly, the Commission considers it appropriate to use an average quality with an average fibre length as the foundation for determining an „index price“, which means that in the future a Middling 1.3/32“ quality will serve as the basis (previously Strict Middling  1.3/32“).

How will the changes affect the price?

We are talking about a manageable adaptation, which will only come into effect once. There will be a one-time adjustment of approx. 100 pts/lb, due solely to the somewhat low base quality.
How do you rate the currently relatively high cotton price? What price development do you expect in the medium term?

With all the variable natural influences such as weather or crop development, there are currently also some additional ‘handmade’ risks, in particular any possible trade barriers between the US, China and Europe and the crises in Korea and the Middle East. Should these have a ‚neutral‘ impact on commodity prices, then we expect stable to slightly firmer prices over the medium term, based on the assumption that China has reduced its significant reserves to a tolerable level and will reiterate its role as a cotton importer in the future – as I said, subject to the above-mentioned uncertainties.

Thank you for the interview.

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