Cotton marketing in 2003-04 was on a roller coaster. Speculative activity in the international and domestic markets was at peak. Rumours of a short crop sky-rocketed the fibre prices.

Bulls controlled the market in early season. Futures at the New York Cotton Exchange (NYCE) rose from 50 some cents/pound in August to 84 cents/lb in October. Pundits talked of another record at the NYCE. Local market followed the NYCE futures.

An increase of Rs200 per maund or more within 24 hours was not common in the past seasons. Ginners and mills conducted trade after opening of the New York market at 8pm. Local market was in the grip of the NYCE cotton futures.

Even farmers made a practice of knowing the prices before bringing their produce in mandi. Majority of the stakeholders thought that the cotton futures would remain increasing for ever.

Many textile mills became the victim of speculative activity and rumours of a short crop. This is a commodity market. No one knows what is next. The majority of stakeholders in Pakistan have no idea how to interpret the cotton futures. They don't know which fundamentals move the market up and down.

We need to understand who produces and consumes raw cotton all over the world. Tables 1, 2 and 3 show the top 20 producers, consumers and importers, respectively for 2003-04.

These are not the final numbers but there would be only a few changes. These numbers are based on the USDA's April demand and supply report of raw cotton. China drives the world cotton market with the highest consumption.

It consumes approximately one-third of the raw cotton and is the largest producer, consumer and importer. The demand has gone up from 23.5 million bales (480lbs bales) in 2000/01 to 31.5 million bales in 2003/04.

The US consumes little over 6 million bales per annum. The US textile industry is down, while the Chinese is booming. The US has more than 13 million bales of 480 lbs for sale after their consumption shrank to 6.2 million bales.

They are to produce a bumper crop of 18.2 million bales in 2003-04 season. China is going to be the largest importer of the US cotton with 4.5 million bales in the 2003-4 marketing season.

Overall, China is going to import 8.5 million bales this season which is more than the total cotton production of Pakistan this season. Table 1: Top 20 cotton countries by production Table 2: Top 20 countries by cotton consumption Table 3: Top 20 countries by cotton import Source: United States Department of Agriculture Foreign Agricultural Service

If China stops shopping cotton for one week the futures go down. Pakistan now consumes more than 12 million bales (170kg bales) compared to less than 10 million bales it consumed three years back. It is now a net importer of raw cotton.

According to the USDA report, Pakistan in February was the third largest importer. Since then, Turkey has replaced Pakistan. With such a huge consumption and low production, the raw cotton is in a big demand here.

It was only because of this increased consumption that the Pakistani cotton market shot up early this year and matched the international market. The mills knew that the country would not produce the needed quantity.

Untimely rains in Sindh and Southern Punjab, pest attacks and shortage of pesticides were enough to heat the market up. Another factor was the government's open policy - no restrictions on import/export.

All this guaranteed that the mills would buy cotton in parity with the international market. Gone are the days when Pakistani cotton market would experience free fall eroding several hundreds of rupees/maund in a couple of days without any obvious reason.

Mills, ginners and farmers have to follow the international market closely. We have to guess why the market is going up or down; will it have a lasting trend. Also how up or down it could go. Fundamentals drive the market. The best place to follow is the NYCE.

None can deny the risks involved in the commodity futures' trading but this is not gambling. The practice is more than a century old and the idea behind it is to discover prices of the commodity being traded.

Physical trading might not involve sufficient number of buyers and sellers. A futures commodity market has speculators and hedgers. Hedgers who could be farmers or merchants get the opportunity to lock the prices of their produce or merchandize in a future month thus hedging the risk.

The futures market provides a guidance to farmers as to what should be sown based on the futures prices. For example, cotton and soyabeans compete for acreage. Soyabean is stealing acres from cotton because the future prices of soyabeans are firmer than the cotton these days.

Traders or textile mills could also do hedging. Speculators, however, make money (or loose money) by guessing the market right (or wrong). The futures market keeps an eye on the fundamentals, rumours or the news that could affect the demand and supply of the commodity.

If the market finds that China is not buying enough cotton, the futures market goes down. Texas did not get enough moisture, the futures market goes up. There is a hurricane coming in North Carolina which could damage the cotton crop, the future prices go up.

The US put sanctions on China barring or limiting exports of gowns and bras which would result in less imports of the US cotton by China, the market goes down. Stronger or weaker dollar, the world economy getting better or worse, the US job market getting better or worse, China increasing the interest rate or not, could be just a few factors which influence the cotton futures market day in and day out.

Technical factors also affect the futures market. After every rally at some point, there is profit-taking which brings the market down. Experts watch if the market is overbought or oversold.

In either case, it has to reverse action to bring a balance in buying or selling. After adjusting to technical factors, market again focuses on demand and supply fundamentals.

The NYCE cotton futures market considers the domestic market (US) first, prices are more reflective of local fundamentals. Main focus is how much cotton could be exported out of the US and this is the single most determinant of the cotton prices. The NYCE futures market is a barometer of cotton all over the world.

There could be a difference between the futures prices and the cash market. The cash prices with better characteristics would be higher than the futures. The best source to discover the cash prices of cotton in the international market on any given day is the "Cotlook Indices".

The Cotlook Indices namely Cotton A Index and Cotton B Index are released by the Cotton Outlook, a UK-based organization. The Pakistani cotton grade "1503" is among the 14 kinds of raw cotton listed under A Index.

The Pakistani cotton grade "Afzal" is among a few kinds of cotton listed under B Index. These indices are released at 2:30pm UK time on every working day and could be found at www.cotlook.com with a lot of other information.

A number of textile mills argue that the foreign lint has a better recovery as it contains less trash and contamination. The best quality cotton available in Pakistan has less than the commonly perceived 8-9 per cent of trash value.

There are a number of foreign growths which have trash and contamination problems similar to ours including the American cotton. To get less contaminated cotton with guarantees from the US would require paying premiums. The machine picked cotton from the US market also has certain disadvantages as it does not pick cotton as clean as it could be hand picked.

Another market to follow is the China National Cotton Exchange (CNCE). The CNCE is a platform to deal with the forward trading in physical cotton. Now it also trades in foreign lint.

The local lint when converted to the US dollars is always a couple thousand yuans/ton more expensive than the American lint at the CNCE. The whole cotton world follows the CNCE very closely as a surge in this market is an indication of a rise in the NYCE cotton futures and other markets as China is the biggest player in world market.

The CNCE has a limit of an increase or decrease of 300 yuans per ton in a business day. Earlier this season, the market closed the limit up, daily for few days. The first day they removed the limit, the market went up more than 1000 yuans per ton in a single day.

That was a clear indication that China would terribly be short of raw cotton this season. The NY cotton futures followed the lead and the raging bulls took the market to 84 cents per pound.

India would end up exporting around a million bales this season. Pakistani mills imported 200,000 to 300,000 bales via Dubai according to some estimates in the press, which are not confirmed by a reliable source.

Whenever India puts an offer to export its raw cotton, it could be found with indicative demanded prices on www.cotcorp.com. With all these talks of opening up trade with India and Safta, we might have more direct trade in raw cotton with India in the future. So following the Indian cotton market has become more important.

The market of raw cotton is volatile and unpredictable. One has to be quick in decision-making when it comes to trading raw cotton. A fortune can be made and a fortune can be lost by delaying a transaction for few hours.

A proper guess can only be made if one is aware of all the dynamics in the domestic and international markets. Keep your eyes and ears open. Internet has made life easier.

Follow all cotton markets in the world, read all commentaries, gather all facts and figures and then make guesses. Billy Dunanvant-the biggest cotton merchant in the world- says, "In cotton, success is a matter of timing and flexibility".