 "Demand by pressure groups for suspension of cotton futures irrational: MCX")
Leading commodity bourse MCX on Tuesday said pressure groups in the value chain of the cotton industry are making "irrational" demand for suspension of futures trade in cotton on its platform despite fundamentals support high prices of the commodity.
MCX, in a statement, said a ban on cotton futures would be detrimental as after many years farmers in India for the first time are benefitting from high prices driven by the fundamentals.
India is a net exporter of cotton and the prices are moving in tandem with international prices. Further, Cotton is not in the list of essential commodities and any suspension in the commodity may lead to undesirable economic outcomes, it added.
Expressing "surprise" over certain pressure groups working for suspension of the cotton futures contract on the exchange, MCX said, "Their arguments are devoid of any merit and do not have any empirical evidence".
The exchange alleged that the pressure groups are "lobbying for its suspension" at the cost of farmers who are major beneficiaries of higher cotton prices after many years.
"By not allowing markets to function, the objective of such groups is to make transparent prices unavailable to farmers and reap benefits out of the opacity that would result from dysfunctional markets," it said.
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The unhedged are the ones who are actually getting exposed to higher price risk. The squeezing profit margins of these participants has led them to clamour for suspension, it added.
Stating that fundamentals support the price rise in cotton, MCX said it is because market participants are expecting lower production than what has been estimated by the Cotton Association of India (CAI) for the 2021-22 marketing year (October-September).
CAI has pegged cotton output at 360.13 lakh bales for the current year, coupled with a lower opening stock of 75 lakh bales of 170 kilos each as of November 20, 2021. However, due to unseasonal rainfall during October-November in major producing areas, market participants are expecting the actual cotton production for 2021-22 to be 330-335 lakh bales, it said.
Besides harvest, MCX said that the unseasonal rains also raised quality concerns, which is driving up demand for quality cotton. The farmers are also reported to be holding on to good quality cotton in anticipation of better prices for their produce.
The supply is also adversely affected due to lower opening stock, which fell sharply to 75 lakh bales for 2021-22 against 125 lakh bales for 2020-21, following export demand on account of increasing global consumption.
The arrival of the current cotton crop during October-December 2021 was down by 37 per cent. However, prices started cooling off since November 2021, as arrivals in mandis improved, it said.
According to MCX, there is the active participation of hedgers in cotton derivatives on its platform with an efficient delivery mechanism and higher open interest volumes.
"It is ironical that very purpose of derivative contracts is to protect from price volatility and those very groups, who ought to have hedged their risk on the exchange are clamouring for suspension of the cotton contract, which is a protective financial instrument, it said.
Stating that India is only a price taker and represent only a small fraction of the global derivatives market, MCX said the trading in global markets would continue as usual even if Indian markets are shut.
As a result, the suspension of cotton futures in India only deprives domestic participants, especially small and medium value chain participants and producers from taking part in the global price discovery process and makes them totally exposed to price risks, it noted.
On the other hand, many of the large domestic entities who are hedging in global markets gain a competitive edge over small and medium players, it added.
"In the light of the above, the discerning authorities should able to appreciate the above facts and decide further course of action in the best interest of all stakeholders in the Cotton eco-system," MCX urged.
In December 2021, the government had banned future trading in seven agricultural commodities, such as wheat, moong dal and soybean for one year in a bid to rein in prices.
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