Cotton

Futures Contracts
The Government of India and the Forwards Markets
Commission (FMC) the commodity futures market
regulator- have recently eased restrictions on futures
trading on 122 commodities (including several agricultural
commodities, precious metals and base metals).
The National Commodity & Derivatives Exchange
Limited (NCDEX) has eight national level institutional
shareholders. These are Canara Bank, CRISIL Limited
(earlier known as the Credit Rating Information Service of
India Limited), ICICI Bank Limited, IFFCO (Indian
Farmers Fertilizers Co-Operative Limited), Life Insurance
Corporation Of India (LIC), National Bank for
Agriculture and Rural Development (NABARD),
National Stock Exchange (NSE) and Punjab National
Bank (PNB). All these institutions are reputed entities in
their respective fields and NCDEX leverages their expertise
to realize its potential in the commodity space for the
benefit of its trading and clearing members.
NCDEX commenced operations on December 15, 2003
and now offers trading facilities through its trading and
clearing members spread across over 160 centres in the
country.
For the benefit of its trading and clearing members in
particular and the general public,
NCDEX
F Has established reliable, time tested and transparent
trading platforms.
F Has developed robust assaying and warehousing
facilities: enabled holding of commodity balances in
electronic form
F Provides reliable spot prices in major commodities.
F Is partnering with consumer goods industry players,
rural kiosk network entities, technology companies,
news agencies and banks for both spot and futures
price dissemination.
F Is working with agri extension service providers to
help farmers hedge their price risks
F Is working with the tax authorities to clarify various
sales and service tax issues
F Is developing exotic products such as weather
derivatives, commodity indices, etc.
NCDEX is now offering twenty two agricultural
commodities and two bullion products for trading.
 Cotton
Cotton is an important non-food crop, which occupies a
significant position both-from agriculture and
manufacturing sectors point of view. Today, cotton
occupies a significant position in the Indian economy on all
fronts-as a commodity that forms a means of livelihood to
over millions of cotton cultivating farmers at the primary
agricultural sector; as a source of direct employment to
over 35 million people in the secondary-manufacturing
textile industry that contributes to 14% of the country's
industrial production, 27-30% of the country's export
earning and 4% of its gross domestic product (GDP).
Geographical/ Agronomical suitability for cotton
cultivation
Cotton is a tropical and sub-tropical crop. For the
successful germination of its seeds, a minimum
temperature of 15 0 C is required. The optimum
temperature range for vegetative growth is 21-270C. It can
tolerate temperatures as high as 430C, but does not do well
if the temperature falls bellow 210C. During the period of
fruiting, warm days and cool nights, with large diurnal
variations are conducive to good ball and fibre
development. In the case of rain-fed cotton, which
predominates and occupies nearly 75% of the area under
this crop, a rainfall of 50 cm is the minimum requirement.
More than the actual rainfall, a favorable distribution is the
deciding factor in obtaining good yields from rain fed
cotton.
Cotton is grown on a variety of soils. It requires a soil
amenable to good drainage, as it does not tolerate water
logging. It is grown mainly as a dry crop in the black and
medium black soils and as an irrigated crop in the alluvial
soils. The predominant types of soils on which the crop is
grown are (1) alluvial soils-predominant in the States of
Punjab, Haryana and Rajasthan (2) the black cotton soils,
(3) the red sandy loams-predominant in States of Gujarat,
Maharastra, Madhya Pradesh, Andhra Pradesh, Karnataka,
Tamil Nadu and Orissa and (4) lateritic soils- found in parts
of Tamil Nadu.
The cotton value chain:
FIGURE 1: The Cotton Value Chain

Cotton Segments Textile Segments

Primary Final
Ginning Trade Yarn Textile Wholesale
Production Consumer

Source:Rabobank, 2003

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Global supply and demand scenario

Since 1990, the global production of cotton has been

fluctuating in the narrow range of 16.5-23 million tons.
Similarly, consumption has been in the range of 18-22
million tons. The global export and import trade of cotton
during the post 1990 era has been in the range of 6.5-7.5
million tons.

The key producing centers

Cotton is primarily grown in 9 key states in India:

Gujarat Andhra Pradesh Tamil Nadu

Surendranagar, Guntur, Coimbatore,

Mehsana, Asifabad, Tirupur,

Junagarh, Adilabad, Erode,

Valsad, Sattenapalle, Dharapuram,

Rajkot, Narsaraopet, Madurai,

Bharuch, Inkollu, Dindigul,

Baroda, Chilkalurpet, Theni, Salem,

Ahmedabad, Bela Sattur

Kadi

Maharashtra Karnataka Madhya Pradesh

Nagpur, Wani, Hubli, Annigeri, Indore,

Akola, Yeotmal, Charwad, Ratlam,

Jalgaon, Gadag, Barwah,

Amravati, Nargund, Bhikangaon,

Nanded, Kottur, Bellary, Ujjain,

Khamgoan, Raichur, Haveri, Sanawad, Khar,

Prabhani, Chitradurga, Khandwa,

Aurangabad Manoli Anjad,

Burhanpur,

Sendhwa

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Punjab Haryana Rajasthan

Abohar, Sirsa, Mansa Hanumangarh,

Bhatinda, Mandi, Sri Ganganagar,

Malour, Adampur, Sangaria, Pili Banga,

Faridkot, Fatehbad, Ratia, Kesrisingpur,

Barnala, Bhatu, Bhuna, Sadulshar

Rampuraphul, Jeevannagar

Maur, Buldhlada

Apart from these 9 states, other minor states are Orissa,

Meghalaya and Uttar Pradesh.

According to the latest figures released in the Indian

Cotton Annual publication of EICA (East India Cotton
Association), the state-wise figures of production in terms
of Lakh bales are as follows:

What are the classifications of Cotton?

Cotton is primarily classified in India as per CAB (Cotton

Advisory Board) according to its Staple Length (the basis
staple length is given in parenthesis):

Short Staple: 20 mm & below

Examples: Bengal Deshi

Medium Staple: 20.5 mm 24.5 mm

Example: V-797 (22 mm) Jayadhar

(22.5 mm), J-34 (24.5 mm),

Y-1 (24 mm)

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Super Medium Staple: 25 mm 27 mm
Example: NHH -44(25 mm),
LRa-5166 (26 mm), J -34(26mm)
Long Staple: 27.5 mm 32 mm
Example: h-4/MECH-I
(28 mm), S-6 (29 mm)
Extra Long Staple: 32.5 mm & above
Example: MCU -5 (32 mm),
DCH -32(35 mm)
however, in some parts of the country, the trade combines
both the Medium Staple category and Superior Medium
category. Similarly in other parts of the country, Long
Staple and Extra Long Staple categories are combined into
Long Staple category.
The market share of the various Staple length categories-
Short, Medium (i.e. Medium & Superior Medium) and
Long (Long & Extra Long) in terms of Lakh bales are as
follows:

Based on the quality of cotton, the two leading associations

in India EICA (East India Cotton Association) and SICA
(South India Cotton Association) prepare boxes of cotton
samples from various varieties every year during the
respective cotton seasons and classify the cotton into 6
grades:
a) Extra Super Fine
b) Super Fine
c) Fine
d) Fully Good
e) Good to Fully Good
f) Good
Any quality that is worse than Good is called Below Good.
However, the cotton trade is not that savvy all around the
country as these two leading associations. In some parts of
the country like in Gujarat, people use simpler grades like
Inferior, Average, Medium and Superior. In other parts like
in Punjab, where the cotton is primarily Saw Ginned, the
grades used are usually Good Average and Cart Selective.

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There are too many varieties in Cotton, are there any
benchmark varieties?

There isn't a single benchmark variety. These days some of

the key varieties, prices of which are closely monitored in
India are:

(a) Bengal Deshi

(b) V-797

(c) Jayadhar

(d) J-34/ Bikaneri Narma (SG)

(e) Y-1

(f) NHH-44

(g) LRA-5166

(h) H-4/ MECH-1

(i) S-6/S-4

(j) MCU-5

(k) DCH-32

Out of these the 5 most prominent price drivers are:

(a) J-34 (Punjab, Rajasthan, Haryana)

(b) LRA-5166 (Madhya Pradesh, Maharashtra and

Andhra Pradesh)

(c) H-4 (Madhya Pradesh, Maharashtra and

Andhra Pradesh)

(d) S-6 (Gujarat)

(e) DCH-32 (Karnataka, Tamil Nadu and Andhra

Pradesh)

Apart from the above 5 varieties, NHH-44 is another

variety that is primarily concentrated in Maharashtra and
dominates in terms of production. The market share for
some of the important varieties as a % of the Indian total
production in terms of running bales is as follows:

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Cotton varieties keep getting replaced over times as and
when better varieties are available in the market. For
instance, some of the new varieties that are gaining in
prominence are Bunny and Brahma.
What are the ways Cotton is quoted in the market?
Cotton is quoted in the market in three units:
1. Rs/ Quintal
2. Rs/ Candy
3. Rs/ Maund
All the above are weight measures. The conversion factors
are:
1 Candy = 3.5562 Quintals = 355.62 Kgs
1 Maund =0.373242 Quintals = 37.3242 Kgs
Apart from the above weights, cotton is also press packed in
the formed of Bales. One bale weight ranges from Rs. 165
Kgs to Rs. 175 Kgs. Bales are used more as a measure of
number of units rather than a measure of weights. Since,
the individual bales weights are not standardized, there is
an additional term called Statistical Bales also used a
measure of weight.
The Statistical Bales weights in various countries are as
follows:
Australia: 227 Kgs Colombia: 223 Kgs
Egypt: 327 Kgs India/ Pakistan: 170 Kgs
Mexico: 220 Kgs Nigeria: 185 Kgs
Sudan: 191 Kgs
Tanzania: 181 Kgs Uganda: 182 Kgs
USA: 218 Kgs South Africa: 200 Kgs

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What are the exchange contract specifications?
For both the Medium Staple Cotton and Long Staple
Cotton contracts

Trading hours Mondays through Fridays

Trading Hours 10.00 a.m. to 5.00p.m. &

5.30 p.m. to 11.00 p.m. with a pre
opening session between 5.25 p.m. to
5.30p.m. Closing Session 11.15 p.m. to
11.30 p.m.

Saturdays

Trading Hours 10.00 a.m. to 2.00 p.m.

Closing session 2.15 p.m. to 2.30 p.m.

On the expiry date, contracts expiring on

that day will not be available for trading
after 5.00 p.m.

Delivery specification Upon expiry of the contracts, if any seller

with open position desires to give
delivery at a particular delivery center, then
the corresponding buyer with open
position as matched by the process put in
place by the Exchange shall be bound to
settle by taking physical delivery

No. of active Minimum 2 contracts with a maximum of

contracts 12 contracts running concurrently

Opening of contracts The first set of contracts will be launched

upon approval of the Forward Markets
Commission

Subsequently, trading in any contract

month will open on the 21st day of the
month. If the 21st day happens to be a non
trading day, contracts would open on the
next trading day

Due date/Expiry date 20th day of the delivery month

If 20th happens to be a holiday, a Saturday

or a Sunday then the due date shall be the
immediately preceding trading day of the
Exchange

Closing of contract All open positions will be settled as per

general rules and product specific
regulations

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Price band Limit of 10 per cent of the last traded price
of previous trading day or as approved by
the Relevant Authority of the Exchange
from time to time Limits will not apply

l on the opening day of the new contract

(as there would be no previous day price to

base the freeze on the limits)

l on other days, if the limit is reached

during the final 30 minutes of the Trading

Hours

Position limits Member-wise: Max (Rs. 40 crore, 15% of

open interest), whichever is higher
Client-wise: Max (Rs. 20 crore, 10% of
open interest), whichever is higher

M E D I U M S TA P L E C O T T O N FUTURES
CONTRACT SPECIFICATIONS

Type of contract Medium Staple Cotton Futures Contract

Name of commodity Medium Staple Cotton (All cotton traded
as J 34(SG ))
Ticker symbol COTMSCABH
Trading system NCDEX Trading System
Basis Ex-warehouse Abohar, exclusive of all taxes
Unit of trading 55 Bales with each bale of 170 kg(=93.5
Quintals)
Delivery unit 55 Bales with each bale of 170 kg (=93.5
Quintals)
Acceptable +/-10 % weight variation for
each bale
Quotation/base value Rs./Quintal
Tick size Re.1.00
Quality specifications Medium Staple Cotton (All cotton traded
as J 34(SG )
a.Staple length: As per HVI mode of
assaying
i. Basis: 25.5 mm
ii.Tenderable Range: 24 27 mm with no
premium above 27 mm.
b.Micronaire:
i. Basis:3.7 4.8
ii. Tenderable Range:3.5 5
c.Strength: With ICC mode of assaying
i.Basis:21 G/Tex
Ii.Tenderable Range:19 24 G/Tex

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 d.Grades:
i.Basis: Fine
ii.Tenderable range of grades: `Good to
Fully Good', `Fully
Good', `Fine', `Superfine', `Extra
Superfine'
e.Moisture:
i.Basis: 8.5 9.5%;
ii.Max. tenderable up to 11% moisture
with discount in the ratio of 1:1.
f. Trash content:
i.Basis: 4 - 5%,
ii.Max. tenderable up to 7% with discount
in the ratio 1:1
Also tenderable below 4% trash with
premium in the ratio of 1:1
Quantity variation +/- 3% for total weight of each deliverable
lot
Trading and Delivery February, April, June, August, October
months and December
Delivery center Abohar
Also deliverable Sirsa, Sriganganagar

LONG STAPLE COTTON FUTURES CONTRACT

SPECIFICATIONS
Type of contract Long Staple Cotton Futures Contract
Name of commodity Long Staple Cotton (All cotton traded as
Sankar)
Ticker symbol COTLSCKDI
Trading system NCDEX Trading System
Basis Ex-warehouse Kadi, exclusive of all taxes
Unit of trading 50 Bales with each bale of 170 kg(=85
Quintals)
Delivery unit 50 Bales with each bale of 170 kg (=85
Quintals)
Acceptable +/-10 % weight variation for
each bale
Quotation/base value Rs./Quintal
Tick size Re.1.00
Quality specifications Long Staple Cotton (All cotton traded as
Sankar)
a.Staple length: As per HVI mode of
assaying
i.Basis:28 mm
ii.Tenderable Range: 27.0 29.5 with no
premium above 29.5mm.

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 b.Micronaire:
i.Basis: 3.7 4.5
Ii. Tenderable Range: 3.4 4.8
c.Strength: With ICC mode of assaying
i.Basis: 22 G/Tex
ii.Tenderable Range:20 -26 G/Tex
d.Grades:
1.Basis: Fine
2.Tenderable Range for grades: `Good to
Fully Good', `Fully Good', `Fine',
`Superfine', `Extra Superfine'
e.Moisture:
i.Basis: 8.5 9.5%
ii.Max. tenderable up to 11% moisture
with discount in the ratio of 1:1.
f. Trash content:
i.Basis: 3 - 4%,
ii.Max. tenderable up to 5% with discount
in the ratio 1:1
Also tenderable below 3% trash with
premium in the ratio of 1:1
Quantity variation +/- 3% for total weight of each deliverable
lot
Trading and Delivery February, April, June, August, October
months and December
Delivery center Kadi
Also deliverable Rajkot

Will the spot prices be disseminated?

The exchange will disseminate the spot prices of cotton

twice a day. For both the cotton varieties, the exchange will
be polling / calling up randomly 25 market participants
from a panel of 40 market participants and ask them for the
prices twice daily. Then after collecting the raw prices, the
exchange will carry out a process called bootstrapping.
Bootstrapping is a scientific procedure of removing the
outliers of raw prices (i.e. prices that are too far away and
averaging the remaining prices. NCDEX has outsourced
the spot price polling of Cotton to CMIE (Center for
Monitoring of Indian Economy). The exchange also invites
spot market players for participating in the spot price
polling process.

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In the case of MSC (SG), the exchange will disseminate the
spot prices from

1. Abohar (Punjab)

2. Sirsa (Haryana)

3. Sri Ganganagar (Rajasthan)

In the case of LSC, the exchange will disseminate the spot

prices from

1. Kadi (Gujarat)

2. Rajkot (Gujarat)

How have the cotton movements been in the last few

years?

The charts of cotton price movements are enclosed below:

Figure 2:

Figure 3:

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What are the additional plans of the exchange?
The exchange is planning to allow additional deliverable
varieties within the two contracts. This is to facilitate
traders in other major states of India like Maharashtra,
Andhra Pradesh etc. to give deliveries for their local
varieties.
The exchange has added other delivery centres for Cotton.
For instance, in the case J-34, the exchange has added
representative delivery centre like Sirsa in Haryana and
Ganganagar in Rajasthan.
Currently the regulator does not permit options. As and
when options are permitted for trading, the exchange will
also introduce option contracts in Cotton.
How will the premium & discounts be given?
Premium/ discounts for Cotton will be given on the basis of
quality parameters and Grade. The exchange will be polling
for the premium/ discounts two weeks prior to the expiry.
It will then convert the absolute premium/ discounts into
percentages and apply the percentages on the spot prices on
the 20th day of the month (the expiry date). The premium/
discounts will be communicated to members before the
expiry dates through the trading workstation and the
exchange website.
Which are the leading trade associations in Cotton?
There are around 22 cotton associations in India. Some of
the prominent cotton trade associations are East India
Cotton Association (Mumbai), South India Cotton
Association (Coimbatore), North India Cotton
Association (Bhatinda), West India Cotton Association
(Ahmedabad) etc.
NCDEX Information
The NCDEX homepage http://www.ncdex.com will carry
real time price data. In addition the site will regularly
provide historical data on settlement prices, daily and
historical highs and lows for each contract. It will also
provide information on changes in contract specifications,
details of members, market timings and exchange holidays.
NCDEX will make available historical data for
research purpose through different electronic media.
The Daily quotes will also be disseminated through
different information service providers. These details will
also be available on the website.

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Why trade on NCDEX?

l Provide a transparent, anonymous and easy way of

trading through its nation wide screen based trading
system

l Provide online dissemination of spot prices through

a robust methodology

l Is the only commodity exchange in India that is

promoted by national level institutions. The
promoters are eight national level institutional
shareholders. These are Canara Bank, CRISIL
Limited (earlier known as the Credit Rating
Information Service of India Limited), ICICI Bank
Limited, IFFCO (Indian Farmers Fertilizers Co
Operative Limited), Life Insurance Corporation Of
India (LIC), National Bank for Agriculture and
Rural Development (NABARD), National Stock
Exchange (NSE) and Punjab National Bank (PNB).
The eight promoters are leaders in their respective
fields and bring with them institutional building
experience, trust, nationwide reach, technology and
risk management skills.

l Has the largest settlement guarantee fund among all

commodity exchanges in India

l Has a robust and proven clearing and settlement

system. Its clearing partner is National Securities
Clearing Corporation of India, a fully owned
subsidiary of NSE

l Has tied up with reputed warehouses and logistics

partners to provide robust physical delivery processes

Disclaimer: The brochure has been prepared for general

information purpose only. While NCDEX has made every effort
to assure the accuracy of the information contained herein, any
affirmation of fact in this brochure shall not create an express or
implied warranty that any example or description is correct.
This brochure is made available on the condition that errors or
omissions shall not be made the basis for any claims, demands, or
cause of action.

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NOTES

14
NOTES

15
NOTES

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