Despite sluggish demand for cotton in the international market exporters are focusing on forward trading. Amid expectations of a recovery in prices, exporters are booking cotton at Rs 34,400-35,000 a candy (356 kg) in forward contracts for delivery in November.
The benchmark Shankar-6 variety is quoted at Rs 35,400 a candy in Mumbai.
A forward contract is a cash market transaction through which delivery of the commodity is deferred until execution of the contract. Though the delivery is made at a later date, the price is determined on the initial trade date. Most forward contracts don’t have standards and aren’t traded on exchanges.
Last year, forward contracts were signed at Rs 39,000-40,000 a candy for Shankar-6 cotton. However, with the cotton arrival season approaching, prices fell to Rs 33,000 a candy. This year, traders and exporters expect prices to tighten further.
Many ginners, however, are not keen on forward contracts. When cotton prices were rising to about Rs 60,000 a candy (in March 2010), farmers were defaulting. Ginners, in turn, could not honour their back-to-back contracts with exporters. Availing of hedging, fluctuating currencies and other intangible factors, exporters were able to record profits. They said they were operating on thin margins and a price two per cent higher or lower than the Cotlook Index made exports viable.
“Ginners sold unginned cotton at Rs 3,000-3,100 a quintal in forward contracts, which shot up to Rs 4,100-4,400 (depending on the quality). So, after last year’s debacle, ginners are reluctant to buy cotton in the forwards market,” said Rakesh Rathi, president, North India Cotton Association. Dilipbhai Patel of the All Gujarat Ginners’ Association said Gujarat was likely to record a drop of 2.5-3 million bales in crop this year, owing to the deficient monsoon and decrease in sowing.
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Though international prices of cotton are about 85 cents a pound (0.45 kg), and this isn’t high enough to fetch good returns, exports may continue till the arrival of the cotton crop. Though the crop has started arriving in some areas, owing to the delayed monsoon, harvesting might be stretched for few days, and substantial quantities of the crop may arrive only after October 15.
Ajay Jhakhar, president of Bharat Krishak Samaj, said forward trading was beneficial for farmers. However, lack of information and infrastructure kept them away from such initiatives. Though losses couldn’t be ruled out, farmers might acquire business acumen through this, he added.
Bhagwan Bansal, president of Punjab Cotton Ginners Association, said due to a fall in cotton acreage and fluctuations in yield due to untimely rains this year, the crop size is expected to shrink. However, the overall situation would be clear by October-end.
The prices of cotton this season are likely to be affected by international demand and trade policies of the Centre. If case these factors were unfavourable, domestic prices might remain subdued, experts said.