Irrational demand by few value chain participants for suspension of Cotton futures

Press Release

Irrational demand by few value chain participants for suspension of

Cotton futures

Mumbai, January 11, 2022: In the recent past, there has been a clamour demanding suspension of derivative contracts on agricultural commodities by a section of value chain participants who do not want transparent pricing and thrive from price opacity. Their arguments are devoid of any merit and do not have any empirical evidence. In the instant case of Cotton contract on MCX, the pressure groups are lobbying for its suspension at the cost of farmers who are major beneficiaries of higher cotton prices after many years.

The commodity exchanges across the world function on the principles of efficient market conduct, which enables every participant to take informed decisions with all publicly available data/information. Such information is assimilated, which could be as frequent as daily updates or weekly/monthly data estimates issued by various state, central government authorities, international newswires, and other sources. An efficient market, where price being a signal, ensures most optimal allocation of scarce resources. At MCX, we are mindful of our responsibilities in ensuring free, transparent and efficient price discovery on the exchange with all its attending risk management measures. In these circumstances, we are surprised to know that certain pressure groups are working for suspension of the Cotton contract on the exchange. We, therefore, thought it appropriate to place before all stakeholders the demand and supply fundamentals of Cotton, various myths and realities, and rationale as to why contracts should not be suspended at this critical juncture of India's growth and development.

A. COTTON FUNDAMENTALS

• 1. Domestic Supply Concerns

• Unseasonal rainfall: Adverse impact on the harvest

Cotton Association of India (CAI) estimated cotton crop for the year 2021-22 beginning from 1st October 2021 at 360.13 lakh bales coupled with lower opening stock of 75 lakh bales of 170 kgs each as on November 30, 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 in the range of 330-335 lakh bales.

Indian Cotton Balance Sheet for the Season 2020-21 and 2021-22

(Estimated as on 30th November 2021)

(in lakh bales)

Details	2021-22	2020-21
Supply
Opening Stock	75.00	125.00
Crop	360.13	353.00
Imports	10.00	10.00

Total Supply	445.13	488.00
Demand
Mill Consumption	292.00	292.00
Consumption by SSI Units	25.00	25.00
Non- Mill Consumption	18.00	18.00

Total Domestic Demand	335.00	335.00
Available Surplus	110.13	153.00
Exports	48.00	78.00
Closing Stock	62.13	75.00

Source: CAI

• Quality concerns

Besides harvest, 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.

• Lower opening stock

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.

• Cotton sowing acreage shrinkage

As per the Committee on Cotton Production and Consumption (COCPC) in November, Cotton sowing acreage (provisional) for CY2021-22 was down by 7.2% to 120.69 lakh hectares compared to 130.07 lakh hectares the previous year.

• Lower arrivals in mandis

Arrivals during Oct-Dec of current crop year was down by 37%. However, prices started cooling off since November 2021, as arrivals in mandis improved.

Year 2020	Year 2021
	Lakh
Month	Bales	Month	Lakh Bales	Change	Change %
Dec-20	106.28	Dec-21	47.24*	-59.04	-56
Nov-20	64.41	Nov-21	46.64	-17.77	-28
Oct-20	27.16	Oct-21	31.12	3.96	15

Total	197.85	Total	125.00	-72.85	-37
Sep-20	6.10	Sep-21	0.94	-5.16	-85
Aug-20	8.50*	Aug-21	3.45	-5.05	-59
Total	14.60	Total	4.39	-10.21	-70

Source: Cotton Association of India (CAI), * Trade estimates; 1 bale = 170 kg.

• 2. Global and Domestic Demand Scenario

• Improved Global demand

As per United States Department of Agriculture (USDA) estimates, compared to the previous season, the global demand for cotton in current year has increased. USDA's estimates for global Cotton demand and supply for the season 2020-21 and 2021-22 are as mentioned below:

Unit in '000' MT	2020-21	2021-22	% Change	Effect
India's Production	6,009	6,096	1.4	Higher production
India's Consumption	5,443	5,617	3.2	Higher consumption
India's ending Stock	2,926	2,360	-19.3	Lower ending stock
Global Production	24,321	26,468	8.8	Higher production
Global Consumption	26,328	27,057	2.8	Higher consumption
Global Ending Stock	19,286	18,666	-3.2	Lower ending stock

Source: USDA, December 9, 2021 estimates

• Higher Polyester yarn prices

The prices of Polyester yarn, which is a by-product of crude oil and a near substitute to Cotton has gone up in the recent past with increase of crude oil prices. The absence of a cheaper alternative to Cotton supported global cotton prices.

• Increased Cotton exports

India's export of textiles, covering cotton yarn/fabrics/made-ups, handloom products, etc. increased by a substantial 40.72 per cent to $1.227 billion in November 2021, compared to $872.55 million in the same month of the previous year, according to the preliminary data on merchandise trade released by the Ministry of Commerce and Industry, Government of India.

B. MYTHS & REALITIES

MYTH 1: Exchange Traded Commodity Derivatives (ETCD) are driven by excessive speculation

Reality: MCX Cotton contract is a compulsory delivery contract ever since inception and market participants depending on their physical market needs either take or give delivery on the Exchange or prefer to look at physical market depending on the prevailing spot prices and logistics and transaction costs. In fact this ensures spot and futures convergence at expiry.

• Active participation from Hedgers

A large section of stakeholders in the value chain such as producers, ginners, millers, exporters, etc. actively trade and participate in the price discovery process on the Exchange for their hedging requirements.

Fiscal Year	Open Interest (in Bales)	Category wise OI in Cotton futures
		% FPOs*/VCPs**/ Hedgers
		Buy	Sell
FY 2020-21#	1,10,735.46	40.91	53.11
FY 2021-22##	1,51,571.62	40.80	52.00

Note:

# Average from daily disclosure for FY20-21 (since Jun '20)

## Average from daily disclosure for FY21-22 (Apr '21 till Jan 6, 2022)

Based on the classification provided by the Exchange members from time to time pertaining to farmers/FPOs, VCPs/Hedgers for the aforesaid period.

*Farmer Producer Organisations **Value Chain Participants

• Efficient Delivery Mechanism

Over the years, the Exchange has been witnessing significant deliveries, which is a testimony of its efficient delivery mechanism. During the previous crop year, despite COVID-19 lockdown restrictions, the Exchange witnessed significant volumes and deliveries in MCX Cotton futures contracts and provided an efficient trading/ delivery platform for VCPs. The current season (Oct 21-Sep 22) also witnessed robust deliveries on the Exchange in the first three expiries.