Cotton English

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.

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Has developed robust assaying and warehousing facilities: enabled holding of commodity balances in electronic form

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Provides reliable spot prices in major commodities.

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Is partnering with consumer goods industry players, rural kiosk network entities, technology companies, news agencies and banks for both spot and futures price dissemination.

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Is working with agri extension service providers to help farmers hedge their price risks

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Is working with the tax authorities to clarify various sales and service tax issues

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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 Textile Segments

Cotton Segments

Primary Production

Ginning

Trade

Yarn

Source:Rabobank, 2003

1

Textile

Wholesale

Final Consumer

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

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,

Kadi

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 categoriesShort, 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:

Egypt:

India/ Pakistan: 170 Kgs

Mexico: Sudan:

327 Kgs 220 Kgs

185 Kgs

191 Kgs

Tanzania: 181 Kgs USA:

Nigeria:

223 Kgs

218 Kgs

Uganda: South Africa:

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182 Kgs 200 Kgs

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 contracts

Minimum 2 contracts with a maximum of 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 CONTRACT SPECIFICATIONS Type of contract

FUTURES

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 assaying

mode of

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 and December months 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 and December months 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.

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Has the largest settlement guarantee fund among all commodity exchanges in India

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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

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