Good morning, Colin. You are responsible for both cotton and sugar at Viterra. Are the two commodities similar?
Commodity traders tend to focus on the differences between their different commodities, but, ultimately, once you block out the technical language and focus on the concepts, they’re all the same.
Cotton and sugar are similar in how the trade houses get involved in the futures expiry process. As a percentage of open interest, I suspect that the positions taken into the expiry – or in the case of cotton, into the notice period – are larger in sugar and cotton than in other agricultural commodities.
Sugar and cotton trading distils down to ‘What is your view on the spreads?’ Your view on the spreads will impact your opinion on the physical premiums. The two are interrelated.
What is the secret to making money in cotton trading?
If there is a secret, it is assessing value.
You can assess value in various ways. In terms of time spreads, the value of cotton may be too low relative to the future, and you can arbitrage that difference. In terms of geographies, you can find dislocations in value across different regions. Essentially all we do is look at the value of something relative to everything else. We try to pick out the outliers that are either over or undervalued and make it work. Trading is about assessing value. You must reduce every discussion down to what value am I measuring this against?
Do you trade spreads and differentials more than the flat price?
I like to trade the time spreads in cotton because time is our only consistent value benchmark.
I don’t like trading cotton flat price. When you trade sugar flat price, you get price points where things happen and the balance sheet changes. The best example is the optionality that the Brazilian mills have in whether to produce ethanol or sugar. You can look at the price of sugar compared to ethanol and make a robust case for the flat price to move higher or lower. You have a value anchor where a move in price changes the balance sheet.
We don’t have that in cotton. Fundamentally, it doesn’t matter if cotton moves from 65 to 90 cents a pound. It doesn’t bring significantly more cotton into production. Nor does it change demand from the spinning mills in Vietnam or the price of jeans on a shelf in Walmart in Texas. Consequently, trading flat price in cotton is often an exercise in second-guessing sentiment.
What advice would you give to a young person beginning in the cotton trade?
Get involved in the physical commodity and understand the full implications of any trade. Once you make a sale, someone must create a shipping order, book containers, send people into the cotton fields to draw samples and test them. Someone must go to the bank to open a letter of credit. You must understand how all those things interact.
You don’t have to be an expert in everything, but you must talk knowledgeably about every aspect of trading. You must understand the implications of tweaking one part of a trade; what does it mean further down the chain?
You must also be comfortable with large amounts of data. The future of trading is in understanding and analysing data. On the production side, it may be in interpreting satellite crop data. On the demand side, it may involve getting live feeds on point-of-sale volumes in retail outlets. Data mining and analysis are becoming a crucial part of our market analysis. It is a huge opportunity.
Thank you, Colin, for your time and input!
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This is a short extract from my book Commodity Crops & The Merchants Who Trade Them available now on Amazon