NCDEX to launch cotton futures by weekend

Cotton futures trading are expected to be launched by NCDEX by the end of this week.

NCDEX will launch two cotton contracts - one on the J-34 (SG) variety with basis staple length of 24.5mm for cotton grown in north India and another for the Shankar-6 variety with basis staple length of 29mm for Gujarat cotton.

These two types were were grown by millions of farmers at the primary level and provided direct and indirect employment to over 35 million people in the manufacturing textile industry. Futures trading was important in cotton due to high degree of price volatility.

Between October 2002 and October 2003, cotton prices rose 15-40 per cent. Cotton Advisory Board (CAB) data indicated that prices of medium staple category of staple length 20.5 mm-24.5 mm like the benchmark J-34 variety gained 33 per cent.

Similarly in the superior medium staple category (staple length: 25mm-27 mm) the price of benchmark LRA-5166 rose 38 per cent.

In the long staple category (staple length: 27.5mm-32mm), S-6 and H-4 prices rose 25 per cent and 28 per cent respectively.

In the extra long staple category (staple length 32.5mm and above), DCH-32 gained 15 per cent. This volatility in cotton prices led to volatility in income of the growers and other involved in the cotton trade.

With the launch of cotton futures trading on NCDEX, the hedge instrument will insulate farmers, ginners, traders and mills.

For J-34 (SG), though the delivery centre for tendering of cotton would be Bhatinda, the exchange would disseminate online spot prices from Abohar and Sirsa too.

Similarly, in the case of Shankar-6, the delivery centre would be Ahmedabad but online spot prices would be from Rajkot too.

The unit of trading for the NCDEX contract would be 11 bales, while deliveries will be tendered in multiples of 55 bales. The quotations for futures will be in Rs/quintal.

NCDEX is keeping the margins for the cotton contracts at 4 per cent and will also be carrying out daily mark-to-market settlement for the futures contracts.

For the purpose of warehousing NCDEX has tied with Punjab Agro Foodgrains Corporation Ltd (PAFCL) and Gujarat State Cooperative Cotton Federation Ltd (Gujcot).

Its comptroller in both the location is SGS. For surveying and assaying, it has tied with East India Cotton Association (EICA), South India Cotton Association (SICA) and Central Institute for Research on Cotton Technology (CIRCOT).

While the exchange has launched futures contracts on only two varieties among the 200 odd Indian varieties, it has chosen the cotton varieties that are the representative varieties in the cotton market.

Narendra Gupta, chief business officer of NCDEX, said, "Our main aim in choosing J-34 and S-6 is to provide a hedge for cotton to market participants. Analysis carried out by NCDEX has found that J-34 acts as a good hedge for price volatilities for varieties like Jayadhar & Y-1. Similarly, S-6 can also act as a good hedge for price volatilities for varieties like H-4 & MECH-1. Thus by introducing contracts on J-34 and S-6 we are actually covering a larger segment of the cotton market that can be hedge with our contracts."

PH Ravikumar, MD and CEO of NCDEX, said, "However to cover the cotton market in other regions like Maharashtra, central India and the south, the Exchange will either allow more varieties under the existing contracts with premium/discount, or have additional futures contracts - but this will happen only after the current two futures contracts become liquid."

NCDEX is working with cotton producer's cooperatives (like Gujarat State Cooperative Cotton Federation Ltd), in partnership with a few banks to bring benefits of the Exchange platforms to small farmers.

Under this structure, farmers can, at the time of sowing the crop, through their cooperative federation, opt to sell a part or whole of the crop forward and lock into a firm price.

In this manner farmers will be insulated again price fluctuations. The banks participating under this structure would fund the farmers for inputs - the take but for the banks would be from the payout from the exchange.

The exchange would be paying out to the farmer under the future sale done by the farmer of his produce. The farmer would even have an option to sell only a part of the expected production.

The balance can be stored when the crop is harvested in the exchange-accredited warehouses and banks would fund them for 60 to 75 per cent against warehoused produce.

It is expected that this structure will prevent farmers from distress selling and will even out price fluctuations for the farmers.

NCDEX is an online electronic commodity exchange promoted by ICICI Bank, National Stock Exchange, NABARD and LIC.