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Whoever says Industrial Revolution, says cotton.- Eric Hobsbawm, British historian
OVERVIEW
Cotton is essentially grown for its fibre,
which is used the world-over to make
textile. Cotton fibre is one of the most
important textile fibres, accounting for
around 35% of the world's total textile
fibre
used.
Cotton's
strength,
absorbency, and capacity to be washed
and dyed also makes it adaptable to a
considerable variety of textile products.
Cotton is used for thousands of things,
Seed Cotton
Farmers
* Standard
cotton
* Extra-long
staples (for
high-quality
textiles)
Cotton seed
OIL MILL
Cottonseed oil
worlds 5th
major edible oil
Cottonseed cake
worlds 2nd major
livestock feed
Cotton fibre
COTTON
SPINNER
TEXTILE
FACTORY
Cotton yarn
China
18%
10%
Others
27%
China
30%
31%
22%
Pakistan
58%
10%
Turkey
USA
10%
5%
India
14%
Pakistan
31%
India
10%
24%
China
17%
Others
42%
Others
38%
Bangladesh
16%
Turkey
11%
Vietnam
14%
USA
30%
India
13%
Brazil
10%
Australia
9%
2013-2014
2014-2015*
Supply
Opening Stock
Crop Size
Imports
Total Availability
40.00
398.00
10.80
448.80
32.00
390.00
8.00
430.00
Demand
Mill Consumption
Small Mill Consumption
Non-Mill Consumption
Total Consumption
Exports
Total Disappearance
Carry Forward
266.00
24.88
8.00
298.88
117.92
416.80
32.00
278.50
26.50
15.00
320.00
70.00
390.00
40.00
Others
11%
Gujarat
31%
Punjab
6%
Maharashtra
22%
Madhya Pradesh
5%
Andhra Pradesh
19%
Domestic factors
! Crop related. Acreage, monsoon,
insect, pest attacks, and so on.
! Carry Forward Stock
! Policy related. Minimum support
price, government policies towards
import-export, and so forth.
! Economy. Well-being of final consumer,
financial condition of textiles and
related industries, and so on.
HEDGING STRATEGY-BUYERS
! Buyers can buy their requirements of
the year in a futures contract by
paying a margin of only 5 % and lock
their prices for the entire year.
! They can keep on procuring cotton in the
physical market round the year and square
off the corresponding position in futures.
! Thus, even if the cotton price goes up,
they do not incur any loss, because the
profit from futures market offsets their
increased cost of procurement.
FACTS ON HEDGING
movements.
Hedging can maximize shareholder value.
Common avoidable mistake is to book profits on the hedge while leaving the physical leg open to risk.
Hedging provides differentiation to companies in a highly competitive environment.
Hedging also significantly lowers distress costs in adverse circumstances confronting a company.
A properly designed hedging strategy enables corporations to reduce risk. Hedging does not eliminate risk,
it merely helps to transfer risk.
To gain the most from hedging, it is very essential to identify and understand the objectives behind hedging
and get a clear picture of their risk profile.
4
ICE cent/pound
Understand the risk profile and appetite while formulating clear hedging objectives.
Hedging can shield the revenue stream, the profitability, and the balance sheet against adverse price
3-Oct-15
40
3-Jul-15
10000
3-Apr-15
50
3-Jan-15
12000
3-Oct-14
60
3-Jul-14
14000
3-Apr-14
70
3-Jan-14
16000
3-Oct-13
80
3-Jul-13
18000
3-Apr-13
90
3-Jan-13
20000
3-Oct-12
100
3-Jul-12
22000
3-Apr-12
110
3-Jan-12
24000
3-Oct-11
MCX `/bale
Price Movement
700
600
400
300
200
Yield (kg/ha)
500
100
Area (million/ha)
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
1999-00
2000-01
1998-99
45
40
35
30
25
20
15
10
5
0
1997-98
Yield (kg/ha)
HEDGING ILLUSTRATIONS
Example 1:
FALLING PRICES
Assume a ginner is holding stocks of 1,000 bales of cotton (29mm) in October. By hedging, he can lock in the price
for his stock in October itself and protect himself against the possibility of falling prices. The spot price of cotton
(29 mm) in October is `18,500 a bale and the price of MCX December 201X contract is `18,700 a bale.
The ginner sells (short) 40 lots of MCX December 201X contracts in October at `18,700 for a delivery in December.
He pays only 5% of the contract value as initial margin to the exchange for entering a position in the futures
market. The prices fall in December. The ginner sells his stock in the physical market for `18,000 a bale and takes an opposite
position in the futures market; by buying (long) 40 lots of MCX December 201X contract at `18,100 a bale.
TIME
CASH
FUTURES
October 201X
December 201X
Result
RESULT
Thus, the ginner protected himself from falling prices with an effective selling price of `18,600 a bale (`18,000 + 600).
Example 2:
RISING PRICES
Assume, in December 201X an exporter receives an order to export 500 bales of cotton in March 201X. He is
planning to buy cotton from the cash market and export it in March. The price in December is `19,100 a bale and
he is worried that prices would rise by March. By hedging, he can lock in the purchase price in December itself, and
protect himself from rise in prices in the cash market.
TIME
CASH
FUTURES
December 201X
March 201X
Result
RESULT
Thus, exporter hedged himself from rising prices in the cash market with an effective buying price of `19,100 (that is, 19,800 700) a bale.
COTTON
Description
COTTONMMMYY
Contract Listing
1st day of contract launch month. If 1st day is a holiday then the following working day.
Last calendar day of the contract month. If last calendar day is a holiday or Saturday then
preceding working day
Trading Period
Trading Session
Trading Unit
25 bales
1200 bales
Ex-Warehouse Rajkot (Within 100 km radius) excluding all taxes, duties, levies, charges
as applicable.
The base price limit will be 4%. The daily price limits shall be relaxed in accordance with provision
of circular no. MCX / T&S / 004 / 2015 dated January 5, 2015.
Initial Margin
An additional margin (on both buy & sell side) and / or special margin (on either buy or sell side)
at such percentage, as may be deemed fit, will be imposed by the Exchange / SEBI, as and when is
necessary, in respect of all outstanding positions
Maximum Allowable Open Position* For individual clients: 1,50,000 bales or 5% of the market wide open position, whichever is higher.
For a member collectively for all clients: 15,00,000 bales or 20% of the market wide open position
whichever is higher.
Near Month Delivery:
For individual clients: 75,000 bales or 5% of the market wide open position, whichever is higher.
For a member collectively for all clients: 7,50,000 bales or 20% of the market-wide open position
whichever is higher.
Delivery Unit
Rajkot (Gujarat)
1)
2)
3)
4)
5)
6)
7) Raichur (Karnataka)
The discounts with respect to transportation charges from each of the additional delivery centres to
the basic delivery center (Rajkot) will be announced by exchange before the launch of contract.
6
Goods should lie within the Tenderable Range according to defined quality specifications.
Outlaying goods will not be accepted for delivery.
Ginning Pattern: Roller Ginned Cotton. Saw Ginned Cotton will be accepted with discount.
1) Basis Grade: Standardized grade as per HVI Middling 31-3; grades between 11-1 and 42-3
are accepted with premium/ discount
2) Staple 2.5% span length: 29 mm (+/- 2mm) with premium/discount. Below 27 mm reject
and above 31 mm no premium.
3) Micronaire (MIC): 3.6 4.8 +/-0.1 with discount. Below 3.5 and above 4.9 reject.
4) Tensile Strength: 28 GPT Minimum, No premium or discount
5) Trash: 3.5% +/-1.5% with premium and discount. More than 5% reject.
6) Moisture: Up to 8.5%. Acceptable up to 9.5% at discount.
The premiums/discounts with respect to quality specifications (in respect to Ginning Pattern,
Grade, Staple, Micronaire, Trash and Moisture) will be announced by exchange before the launch
of contract.
All bales of the lot should be in good condition should be free from oil/ ink stains penetrating
the bale or damaged in any other way. It should have all the proper markings in form the unique
PRN for identifying the individual bale as well as a total lot. The label should give details of
variety, weight and crop year.
The bale must be fully covered with hessian cloth/cotton fabric and no cotton shall be exposed.
The bales must be securely strapped with iron bailing hoops / plastic straps.
Crop conditions
25%
The Due Date Rate (DDR) shall be arrived at by taking the simple average of the last three trading
days polled spot prices, viz., E-0, E-1, & E-2 of Rajkot (within 100 Km radius). In the event of the spot
prices for any one of the E-1 and E-2 is not available the spot price of E-3 would be used for arriving
at the average. In the event of spot prices are not available for both E-1 and E-2, then the average of
E-0 and E-3 (two days) would be taken. If all the three days prices, viz., E-1, E-2 and E-3 are not
available, then only one days price, viz., E-0 will be taken as the DDR.
Delivery Logic
Compulsory Delivery
Note: Please refer to the exchange circulars for latest contract specifications.
* Genuine hedgers having underlying exposure that exceed the prescribed OI limits given in the contract specifications can be allowed higher limits based on approvals.
CONVERSIONS
1 Indian bale
1 Indian Candy
100 Indian bales
1 US Bale (480 pound)
170 Kg
355.62 Kg of lint cotton
Approx. 48 Candy
217.7 Kg
HEDGING QUOTES
In order to mitigate the risks in its marketing activities related to commodity price fluctuations
and potential losses, the Group has a policy, at any given time, of hedging substantially all of its
marketing inventory not already contracted for sale at pre-determined prices through futures and
swap commodity derivative contracts, either on commodities exchanges or in the over thecounter market .
(Glencore Annual Report, 2013)
Cotton futures after a few failed attempts finally gained acceptability at possibly the most
opportune moment. Global trade of Indian cotton is on the ascendancy and the MCX futures
contract has become a national benchmark. The efficient price discovery is demonstrated by
healthy open interest and actual physical deliveries from the exchange accredited ware houses.
Futures trade has given livelihood for many stake holders. It has also helped many farmers to gain
higher revenue due to hedging.
(DD Cotton, India)
151015
IMPORTANT WEBSITES
www.cotcorp.gov.in | www.caionline.in | www.citiindia.com | www.icac.org | www.fcamin.nic.in | www.agriccop.nic.in
www.futuresource.com | www.dowjones.com | www.fas.usda.gov