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					                   Cotton Price
                 Risk Management


Jeffrey M. Christian
February 2002
        This work is undertaken under contract with the Common Fund for Commodities,
        an intergovernmental financial institution established within the framework of the
        United Nations, headquartered in Amsterdam, the Netherlands.

   CPM Group
Today’s Presentation
1.   Introduction: History
2.   Introduction: What can be done in cotton hedging
3.   CFC Program
4.   How Field Tests Could Work
5.   Commodity Market Mechanics
6.   Real World Examples
7.   A Proposed Field Demonstration Program for
     Commodity Price Risk Management
8.   Cotton Hedging, in detail
9.   CFC Program, continued

CPM Group
Introduction: History

 • 1997: EU started the process of seeking new commodity risk
   management regimes.
 • 1998: World Bank published paper, Effective Commodity Price
   Risk Management (Akiyama, Christian), and organized the first
   commodity risk management roundtable.
 • 1999: World Bank International Task Force on commodity price
   risk management formed.
 • 1999: CPM delivers proposals for field tests of hedging programs
   to International Coffee and Cocoa Organizations
 • 2001: World Bank ITF refocuses on possible field tests.
 • 2001: CFC commissions feasibility studies on coffee, cocoa, and
   cotton hedging field tests.



  CPM Group
Introduction: History

 • The World Bank and the Common Fund for
   Commodities have been seeking to implement
   programs to assist in commodity price risk
   management – hedging – since 1998 and 1999.
 • The CFC and World Bank are moving toward field
   tests of a program CPM Group outlined in 1998, using
   existing market instruments, dealers, and relationships.
 • CPM Group currently is conducting a feasibility study
   for the CFC’s program to hedge cotton price risk in
   Tanzania, Uganda, and Zimbabwe.


  CPM Group
Introduction: What can be done

 • The next two slides will illustrate what can be done,
   now, using existing market instruments and facilities,
   to hedge cotton.
 • The key is not to build a new market facility, but to
   provide a bridge between agricultural producers in
   these countries and international markets, to bring
   existing price hedging mechanisms to remote
   producers.




 CPM Group
 One example of a cotton hedge
 Participatory Option -- 17 December 2001 for July 2002

Sales Price
 80
 70
                              Spot Sales
 60
 50
 40                           CPM Group
 30                       Participatory Option
 20
 10
  0
      0 6 12 18 24 30 36 42 48 54 60 66 72 78
                        Market Price
  CPM Group
 Another example of a cotton hedge
 Participatory Option -- 17 December 2001 for July 2002

Sales Price
 80
 70
                               Spot Sales
 60
 50
 40                            CPM Group
 30                        Participatory Option
 20
 10
  0
      0 5 11 17 23 29 35 41 47 53 59 65 71 77
                        Market Price
  CPM Group
Examples of cotton hedges

• These instruments may be structured to provide some
  flexibility to producers.
• In these two examples, a producer could have hedged
  this year’s crop at a minimum price of 36 cents per
  pound, and given up 3 cents of any increase over that
  level…
• Or, the producer could have accepted a slightly lower
  minimum price, at 35 cents per pound, and given up 2
  cents of any increase.
• These prices are for deliverable cotton: Producers
  prices for seed cotton would be discounted accordingly.


CPM Group
Examples of cotton hedges

• These two examples are real-life cases, structured by
  CPM Group in December, 2001.
• These hedges can be executed today, using existing
  market instruments, existing market intermediaries,
  and existing market relationships.
• There is no intention of building new market
  instruments or markets, but simply an effort to build
  an efficient, intelligent bridge between producers and
  international providers of cotton price hedging
  services.


CPM Group
                  CFC Program

  Analysing the Potential for Introducing Market Based
  Price Risk Management to Cotton Farmers and/or their
  Co-operatives




CPM Group
CFC Program
• The Common Fund for Commodities wishes to develop a
  program to bridge the gap between developing nation
  commodity market entities and market-center financial
  institutions providing hedging facilities.
• The CFC wishes to undertake a series of field tests on
  commodities price risk management for such bridge
  building.
• First, the CFC wishes to study the potential structure and
  mechanics of these field tests.




   CPM Group
 CFC Program
• The present study is an investigation of the ability, and
  potential constraints, to launch field tests of commodity
  hedging programs for cotton growers and others in
  Tanzania, Uganda, and Zimbabwe.
• The study is to be completed by late May 2002. A second field
  research trip by CPM Group will occur in April.
• Other studies on coffee and cocoa are underway
  simultaneously.
• A Regional Workshop will be scheduled, probably in June at
  some point in Africa, to outline study results and discuss the
  program.


    CPM Group
How the Field Tests Could Work




CPM Group
CFC Field Tests -- Needs of System
For this program to work, various conditions need to exist in
     the domestic cotton markets:
1. Key buyers of services
2. Domestic intermediaries
3. Legal and regulatory framework
4. Telecommunications infrastructure
5. Providers of hedging services




   CPM Group
1. Key buyers of services

 • This program depends on finding cotton market
   entities large enough to purchase price hedging
   instruments, and then distribute them to smaller
   farmers.
 • Such entities can be farmers, co-operatives, gin mills,
   dealers, exporters.
 • One key aspect of the program will be to develop a
   method of assuring that the benefits of the price
   protection program are distributed to small farmers.



 CPM Group
2. Domestic intermediaries
• Most likely, domestic banks and other financial
  intermediaries will play a role in helping to establish the
  bridge between the international market and domestic
  producers.
• By providing price insurance, the banks actually also would
  be improving the credit worthiness of their small farming
  clients.
• These hedges can be tied into input credits.
• These hedges improve the credit worthiness of farmers
  seeking micro-finance and other input credits.
• Joint programs with international providers of such hedging
  instruments and domestic banks already exist, and can be
  used to provide these instruments and services to producers.


 CPM Group
3. Legal and regulatory framework
 The legal regime must be structured to allow such
   transactions to occur.
 • Companies must be legally allowed, and able, to buy
   and sell commodity options for hedging purposes
   overseas.
 • Financial market regulations must allow for such
   transactions.
 • Foreign exchange laws must allow them as well.
 • Its both the regulatory regime and the rules by which it
   is applied that matter.


  CPM Group
4. Telecommunications infrastructure

 • Effective communications networks will need to be
   developed to handle cotton price risk management on
   an on-going basis.
 • Reliable telephone, telefax, and e-mail are needed.
 • For the field tests, the flow of pricing information and
   hedging structures might be rather minimal.




  CPM Group
5. Providers of hedging services

 • The study is designed to identify as many providers of
   hedging services, options, and cotton related financial
   services as possible.
 • On identification, these financial counterparties will be
   invited to participate in field tests.
    – Introduced to program
    – Review of strategies, systems, networks, operations




  CPM Group
CFC Program

• The study over the next three months will examine and
  analyze each set of requirements and assess what
  obstacles exist to the field test, and whether the field
  tests can be conducted in these three national markets.




CPM Group
An Intelligent Bridge
The need is to build a bridge between local growers and
  international markets.
• It needs to be an intelligent bridge.
• Technical assistance is needed to make sure the hedges are
  optimally structured, and in the best interest of local,
  domestic producers and others.
• An honest broker is needed to make sure the program is
  optimally run.




   CPM Group
An Intelligent Bridge

• Concerns that these complex and powerful financial
  instruments could back-fire on producers are correct and
  well placed. Attention is needed to risk management steps.
• There have been numerous examples of how managers not
  fully understanding the power – good and bad – of options
  have suffered large losses. These examples mostly involve
  large, presumably financially sophisticated corporations in
  Europe, Japan, and the United States.
• So, it is important to build assurances into the cotton
  program to protect smaller companies in the three countries
  chosen for field tests, and to provide them with adequate
  financial advisory services to protect them from such
  potentially devastating mistakes.

CPM Group
 CFC Program
• The program would use existing marketing instruments,
  trading counterparts, and relationships.
• An international organization would provide technical
  assistance and serve as the honest broker.
• The international organization would not have any credit
  exposure.
• CPM Group-like companies can provide technical assistance in
  pricing, placing, and managing hedges.




    CPM Group
What Hedging Cannot Do

   • It cannot stabilize prices.
   • It cannot raise market prices.
   • It cannot offer above-market prices.




 CPM Group
 What Hedging Can Do
• It can raise revenue, both in a given crop year and in
  the long-term.
• It can stabilize revenue.
• It can offer above-market revenues in the long run.
• It can provide predictability to revenue, which
  means….
• It can enhance producers’ credit-worthiness and ability
  to borrow.




  CPM Group
Mechanics of hedging

• Dealer or over-the-counter options.
• Zero cost options programs, that provide protection
  from lower prices and exposure to higher prices.
• Rarely if ever use futures or exchange traded options.
  The futures markets are for the dealers to hedge their
  exposure.




CPM Group
Why these services are not provided now

      •   Credit risks
      •   Profitability issues for hedge providers
      •   Small size of producers
      •   Non-performance
      •   Gap exists




  CPM Group
 Input credit finance & microfinance
• Ultimately, hedging provides a minimum price assurance for
  farmers, co-ops, and others. This should help them in
  securing or enlarging their credit facilities with domestic
  financial institutions that provide input credits, financing,
  and micro-financing.
• There may well be a role in some countries for these local
  financial institutions to serve as local distributing
  mechanisms for the price risk management services. They
  can provide the hedging facilities as part of their overall
  lending facility.



    CPM Group
Commodity Market Mechanics
The Structure and Function of
Commodity Markets
• Structure
      a. Dealer Markets
      b. Exchanges
      c. Instruments




CPM Group
  Instruments
• Spot Sales                 • Synthetic Put vs.
                               Participatory Options
• Futures
                             • Commodity Swaps
• Forwards
                             • Commodity Loans
• Spot Deferred Contracts
                             • Short, Medium, and
• Simple Options
                               Long Term Trades
• Compound Options
     Fences, Min-Maxes,
     Participatory Options
     Programs


   CPM Group
  Instruments
Any time CPM Group advises a client on hedging strategies, it
  presents a range of instruments, structures, and possible
  hedges to it. It assists the client in understanding the risks,
  costs, benefits, and rewards of each possible hedge, and in
  choosing the most efficacious and suitable hedge. It does not
  dictate only one type of instrument to any client. Dealers
  invariably offer only one or two options most suitable to
  them.




    CPM Group
 Instruments
The following schematics portray revenue streams for
  commodities producers using different sales and
  hedging instruments.
Similar comparisons may be done for commodities
  consumers.




  CPM Group
                 Spot Sales

                 35                                        Producers selling
                 30                                        on a spot basis are
Price Received




                 25                                        fully exposed to
                 20                                        rising and falling
                 15
                                                           commodity prices.
                 10
                 5
                 0
                      0   3   6   9 12 15 18 21 24 27 30
                                   Market Price


                  CPM Group
    Spot Sales and Forwards

                 35     Forward sales protect
                        producers from falling             Beneficial Price
                 30                                         Developments
Price Received




                          prices, but remove
                 25     exposure to beneficial
                         price developments.
                 20                                                           Spot Sales
                 15                                                           Forwards
                      Adverse Price
                 10   Developments               Spot sales leave producers
                  5                                fully exposed to price
                                                  variations, good and bad.
                  0
                      0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
                                           Market Price


                 CPM Group
                 Simple Options: Put

                 35                                        Using puts preserves
                 30                                        exposure to beneficial
Price Received




                 25                                        price developments and
                 20
                                                           removes exposure to
                                                           adverse price
                 15
                                                           developments, but puts
                 10                          Spot Sales
                                                           cost money up front and
                                             Simple Put
                 5                                         can be expensive.
                 0
                      0   3   6   9 12 15 18 21 24 27 30
                                  Market Price


                  CPM Group
    Compound Options: Collars
                                    Producers lock in a
                 30               minimum price received,
                                   and benefit only from
                 25                a small portion of any
Price Received




                                      price increase...
                       Minimum
                 20     Price
                       Received
                                                                                   Spot Sales
                 15
                                                                                   Collar
                 10                                   …while giving up this
                                                    exposure to beneficial price
                  5                                 developments if prices rise.

                  0
                      0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
                                      Market Price


                 CPM Group
Compound Options: Collars
1.     With collars -- which is what banks like to sell --
       producers get a little slice of beneficial price
       developments; the banks get most of it.
2.     CPM Group rarely advises clients to use collars – only
       at times of historically high prices when prices seem
       overwhelmingly likely to decline.
3.     The credit risks inherent in collars and forfeiture of
       upside price exposure simply make these
       inappropriate hedges, even if they are the hedges
       banks most commonly offer.
     CPM Group
Participatory Options

With Participatory Options Programs, producers reverse
the field on banks. The producers get to keep most of the
beneficial price developments, giving the banks only the
thin slice.




CPM Group
    Participatory Options Programs
                 30
                                             With POPS, the
                                            producer keeps all
                 25                        of this if prices rise...
Price Received




                       …while protecting
                        against falling
                 20        prices,
                                                                                          Spot Sales
                 15
                                                                                          POPS
                                                                       and giving away
                 10                                                      only a small
                                                                          amount of
                  5                                                     any price rise.

                  0
                      0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
                                           Market Price


                 CPM Group
  Participatory Options Programs
Producers using these options strategies are able to:

      • Receive above-market prices for their
        commodity over time.

      • Protect their operations from sharp decreases in
        prices.

      • Preserve the ability to receive higher prices, if
        prices rise.

      • Avoid unlimited and unnecessary credit risks.

   CPM Group
   Participatory Options Programs
Additionally, hedging with Participatory Options strategies
  provides producers and consumers with far better credit
  exposure than other hedging strategies.
• The credit risk is reduced to a minimum -- typically 2% -
  10% of the total value of the hedge -- compared to unlimited
  risk with most hedge strategies.
• The credit risk and other risks are known at the time the
  hedge is initiated. There are no credit risk surprises possible
  later.
• It really is more performance risk than credit risk.



    CPM Group
  Participatory Options Programs
Additional Benefits
• Properly constructed Participatory Options have no
  premium, fee, brokerage commission, or other transaction
  cost to hedgers, either at inception or later.
• Since the hedger is paying nothing for this hedge, and only
  foregoes a small portion of any price increase, should prices
  rise, the risks of non-compliance on the part of small farmers
  and others is greatly reduced compared to other hedges.




   CPM Group
 Commodity Price Risk Management
• Banks and dealers rarely advise clients to use participatory
  options or other structures favorable to the clients. They are
  too beneficial to clients and do not offer dealers the extra
  profit potential they desire.
• It is inappropriate, with a large conflict of interest, for banks
  and dealers to advise and structure hedges for their
  counterparts.
• Most counterparts rely on their banks and dealers for
  strategies.
• Banks and dealers by definition will not advise their clients to
  use optimally structured hedges.



    CPM Group
Commodity Price Risk Management
Hedging is an on-going process.

It is not a one-time event.




  CPM Group
  Synthetic Put vs. Participatory Options

Banks try to counter the move to Participatory Options by
selling producers "Synthetic Puts." But these programs cost a
lot to initiate. Participatory Options are better -- with no
premiums and reduced credit risk.




   CPM Group
Synthetic Put vs. Participatory Options

110
             Prices
100          Collar
             POPS
90           Synthetic Put

80

70

60
      60          70         80   90   100   110


      CPM Group
Revenue Profile of Participatory
Options for Crude Oil Producer
These are the results in a hypothetical study CPM Group did
on oil sales for the World Bank.

         40
         35
         30
         25
$/bbl.




         20
         15
         10                                      Market Price
                                                 Program Revenue
          5
          0
              89   90   91   92   93   94   95     96    97        98


         CPM Group
  Revenue of Participatory Options
  Program Relative to Market
The oil producer capped its loss (red) relative to the market,
but had exposure to "all" of the gains (green) relative to the
market if prices fell.
            10

            8

            6
   $/bbl.




            4

            2

            0

            -2
                 89   90   91   92   93   94   95   96   97   98


     CPM Group
Real World Examples
Real World Examples
These are actual hedges.

These hedges show what client companies of CPM Group
  have done, and what other groups could have done
  over the past few years, had the bridge been built
  between the private sector providers of these services,
  and developing country commodity producers and
  exports.




CPM Group
Mechanics
• CPM Group advises companies on commodities
  hedging programs.
• Some clients ask CPM Group to structure hedges,
  which they execute and manage themselves.
• CPM also will execute and manage hedge positions for
  clients as their agents.
• Typically, more than one alternative hedge strategy will
  be presented at a time, allowing the client to see and
  compare the relative costs and benefits of various
  strategies, approaches, and instruments.



 CPM Group
 Coffee Hedge 1
 February 1997 for December 1998

Sales Price
 400
 350
 300                            Spot Sales
 250
 200                               CPM Group
 150                           Participatory Option
 100
  50
    0
       0 35 70 105 140 175 210 245 280 315 350 385
                      Market Price
  CPM Group
Coffee Prices:
January 1996 - December 1999
Cents/Lb                                                       Cents/Lb
320                                                                   320
300                                                                   300
280                                                                   280
260                                                                   260
240                                                                   240
220                                                                   220
200                                                                   200
180                                                                   180
160                                                                   160
140                                                                   140
120                                                                   120
100                                                                   100
 80                                                                   80
 60                                                                   60
   Jan- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Jul- Nov- Mar- Jul- Nov-
    96   96   96   96   97   97   97   98   98   98   99   99   99


  CPM Group
 Coffee Hedge 2
 April 2000 for January 2001

Sales Price
 180
 165
 150                          Spot Sales
 135
 120
 105
  90                           CPM Group
  75                       Participatory Option
  60
  45
  30
  15
    0
       0 15 30 45 60 75 90 105 120 135 150 165 180
                     Market Price
  CPM Group
Coffee Prices:
January 1999 - June 2001
Cents/Lb                                                       Cents/Lb
150                                                                   150
140                                                                   140
130                                                                   130
120                                                                   120
110                                                                   110
100                                                                   100
 90                                                                   90
 80                                                                   80
 70                                                                   70
 60                                                                   60
 50                                                                   50
 40                                                                   40
   Jan- Mar- May- Aug- Oct- Jan- Mar- May- Aug- Oct- Jan- Mar- May-
    99   99   99   99   99   00   00   00   00   00   01   01   01


  CPM Group
 Cocoa Hedge 1
 March 2000 for July 2000
Sales Price
 1,600
 1,500
 1,400
 1,300                       Spot Sales
 1,200
 1,100                               CPM Group
 1,000                           Participatory Option
   900
   800
   700
   600
       600     750   900   1,050 1,200 1,350 1,500
                           Market Price

   CPM Group
Cocoa Prices:
January 1999 - June 2001
$/metric ton                                                 $/metric ton
1,500                                                               1,500
1,400                                                               1,400
1,300                                                               1,300
1,200                                                               1,200
1,100                                                               1,100
1,000                                                               1,000
 900                                                                900
 800                                                                800
 700                                                                700
 600                                                                600
    Jan- Mar- Jun- Aug- Nov- Feb- Apr-   Jul- Oct- Dec- Mar- Jun-
     99   99   99   99   99   00   00     00   00   00   01   01


  CPM Group
Cocoa Hedge 2
May 2001 for December 2001
Sales Price
 1,600
 1,500
 1,400
 1,300                       Spot Sales
 1,200
 1,100                               CPM Group
 1,000                           Participatory Option
   900
   800
   700
   600
       600     750   900   1,050 1,200 1,350 1,500
                           Market Price

   CPM Group
Cocoa Prices:
January 2001 - June 2001
$/metric ton                                              $/metric ton
1,250                                                             1,250
1,200                                                             1,200
1,150                                                             1,150
1,100                                                             1,100
1,050                                                             1,050
1,000                                                             1,000
  950                                                             950
  900                                                             900
  850                                                             850
  800                                                             800
  750                                                             750
  700                                                             700
  650                                                             650
    2-Jan 24-Jan 14-Feb 8-Mar 29-Mar 20-Apr 11-May 4-Jun 25-Jun


  CPM Group
Key advantages
     Immediate development, implementation, and operation.
     Uses existing market instruments and institutions.
     No government subsidies.
     Superior price returns compared to non-hedging and
      currently typical hedging.
     Known maximum credit risk at outset.
     Protection against market shocks.
     Self-funding beyond start-up, self-insuring, self-
      sustaining.
     Low costs to implement, with no operational costs for
      governments or users beyond start-up.




CPM Group
Commodity Price Risk Management
The ugly truth of the matter is there are few companies with the
  technical expertise, market knowledge, market experience,
  and options understanding to effectively operate such
  programs.
Banks and dealers simply will not offer such efficient hedges.
Traders trained in banks and dealers do not understand
  hedgers’ needs and operations sufficiently to structure
  suitable hedges.
Many consulting companies that claim knowledge of options
  trading in fact never have managed any trades and lack the
  technical experience and expertise.



    CPM Group
          Cotton Hedges, in detail

This section revisits the two examples of cotton hedges from
the beginning of this presentation, showing how they were
constructed in explicit detail, and comparing how the
revenues that can be earned with these hedges in place
compare to alternative sales methods.



  CPM Group
 One example of a cotton hedge
 Participatory Option -- 17 December 2001 for July 2002

Sales Price
 80
 70
                              Spot Sales
 60
 50
 40                           CPM Group
 30                       Participatory Option
 20
 10
  0
      0 6 12 18 24 30 36 42 48 54 60 66 72 78
                        Market Price
  CPM Group
 Another example of a cotton hedge
 Participatory Option -- 17 December 2001 for July 2002

Sales Price
 80
 70
                               Spot Sales
 60
 50
 40                            CPM Group
 30                        Participatory Option
 20
 10
  0
      0 5 11 17 23 29 35 41 47 53 59 65 71 77
                        Market Price
  CPM Group
Construction of Participatory Option

Participatory Options are constructed by combining three
    options.
1. A producer wants to protect against lower prices, so
    he purchases a put option.
2. Not wanting to pay cash for the put, the producer
    instead pays for it by selling a call option.
3. By choosing the right put to buy and call to sell, the
    producer generates a net profit on these two
    transactions, which it uses to purchase another put
    above these levels, giving it renewed exposure to
    rising prices.


CPM Group
Construction of Participatory Option

The first Participatory Option in this presentation was
    constructed from three components.
1. The producer bought a put option at 36 cents. It paid
    1.68 cents per pound for that option.
2. The producer paid for that put option by selling a
    call option at 36 cents, earning it 5.79 cents.
The net of these two transactions was 4.11 cents.
3. The producer used this net premium to purchase a
    call option at 39 cents, paying 4.09 cents for it.
The result is a zero-premium option.


CPM Group
Construction of Participatory Option

Participatory Option with 36 cent floor, calculations

1.   Producer buys 36 cent put            -1.68 cents
2.   Producer sells 36 cent call          +5.79 cents
     Net profit from these two actions    +4.11 cents
3.   Producer buys a 39 cent call         -4.08 cents
     Net premium is effectively zero      +0.03 cents




 CPM Group
Construction of Participatory Option

The second Participatory Option in this presentation was
    constructed from three components.
1. The producer bought a put option at 35 cents. It paid
    1.36 cents per pound for that option.
2. The producer paid for that put option by selling a
    call option at 35 cents, earning it 6.45 cents.
The net of these two transactions was 5.09 cents.
3. The producer used this net premium to purchase a
    call option at 37 cents, paying 5.17 cents for it.
The result is a zero-premium option. (-0.08 net cost.)


CPM Group
Construction of Participatory Option

Participatory Option with 35 cent floor, calculations

1.   Producer buys 35 cent put            -1.36 cents
2.   Producer sells 35 cent call          +6.45 cents
     Net profit from these two actions    +5.09 cents
3.   Producer buys a 37 cent call         -5.17 cents
     Net premium is effectively zero      -0.08 cents




 CPM Group
Cotton Hedges, Revenue Performance

 The next two slides illustrate how the potential revenue
   performance of various sales and hedging policies
   compare under varying price scenarios.




  CPM Group
Cotton Hedges, Revenue Performance
 Cotton Hedges -- Competetitve Analysis
 December 17, 2001 for July 2002
 US cents per pound

 Market            Spot           Forward             Collar   Participatory     Participatory
 Price             Sales            Sales            (37-43)      Option 35         Option 36

 0                     0                40                37                35               36
 5                     5                40                37                35               36
 10                   10                40                37                35               36
 15                   15                40                37                35               36
 20                   20                40                37                35               36
 25                   25                40                37                35               36
 30                   30                40                37                35               36
 35                   35                40                37                35               36
 40                   40                40                40                38               37
 45                   45                40                43                43               42
 50                   50                40                43                48               47
 55                   55                40                43                53               52
 60                   60                40                43                58               57
 65                   65                40                43                63               62
 70                   70                40                43                68               67
 75                   75                40                43                73               72
 80                   80                40                43                78               77

 Notes :
 Details of the s tructures of thes e pos itions may be found els ewhere in this pres entation, or are
 available from CPM Group.




      CPM Group
Cotton Hedges, Revenue Performance
Revenue
 90

 80
                                                                                      Market Price
                                                                               Spot Sale
 70

 60                                                                                Participatory Option (37)

 50
                                                                                 Participatory Option (35)

 40
                                                                      Forward            Collar
 30

 20

 10

  0
      0   5   10   15   20   25   30   35       40     45   50   55       60        65      70       75      80

                                            Market Price




      CPM Group
Cotton Hedges, Revenue Performance

 Benefits of participatory options outweigh
  those of competing methods of sales and
  hedging.
 • The participatory options offer superior returns in the
   long run. Producers using them retain exposure to
   rising prices, while gaining a minimum price for their
   product.
 • Reduced credit risks. Reduced costs.
 • Losses relative to the market are limited on each
   transaction; gains relative to the market are unlimited.


  CPM Group
            CFC Program




CPM Group
CFC Program
• CPM Group provided template proposals and
  assistance to the Internation Cocoa Organization and
  the International Coffee Organization in November
  1999, outlining commodity hedging field
  demonstrations.
• CFC in July 2001 issued a request for proposals for
  comprehensive studies of the potential for field tests of
  commodities hedging programs in three countries each
  for three commodities each: coffee, cocoa, and cotton.




  CPM Group
CFC Program
1. The CFC has contracted comprehensive studies of the
   target country and commodities markets. These
   studies will outline in detail the potential program
   participants in each country and other aspects of
   potential programs.
2. The CFC seeks to launch field demonstrations, to
   demonstrate the ability of market participants in
   these countries to undertake these hedging programs
   themselves directly and immediately.




 CPM Group
CFC Program:
Comprehensive Study
Many issues to be explored and delineated:
1. Institutional framework and capacity to initiate and
   management such financial trades in target countries.
2. Legal and regulatory framework necessary to allow and
   accommodate options trades.
3. Information transmission and distribution.
4. Management of hedging positions during any field test.




   CPM Group
  CFC Program:
  Comprehensive Study
Issues to be delineated:
• What is the potential for introducing commodity hedging
   programs into these three countries’ cotton industries.
• What services, instruments, and strategies would work best
   for these producers, coops, etc.
• What are the most efficient and effective transmission
   mechanisms, market intermediaries to use.
• What actions are needed to develop a program to provide
   these services to producers.




    CPM Group
CFC Program:
Comprehensive Study
Issues to be delineated (continued):
• What is the institutional, legal, and regulatory framework in
   each country. Can commodity options be used in these
   countries in cotton. What laws and regulations may need
   modification or introduction.
• What safeguards against risks and hazards need to be
   implemented to protect these operations from problems.
• How can these field tests be conducted.
• What will these field tests cost in full.



   CPM Group
CFC Program:
Comprehensive Study
Actions:
• Identify and develop comprehensive list of potential
  hedgers. Contact them and introduce them to program
  concepts and structures.
• Identify and develop comprehensive list of potential service
  providers. Contact them and introduce them to concepts of
  program structure.
• Develop operation for effecting and managing these
  programs.
• Develop program to collect information on program
  performance.



   CPM Group
        30 Broad Street, 37th Floor
           New York, N.Y. 10004
         Telephone: (212) 785-8320
          Telefax: (212) 785-8325
E-mail: investmentbanking@cpmgroup.com
       Website: www.cpmgroup.com

				
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