Cotton futures surge 12-fold in 6 months as prices hit peaks

The Indian textile sector may not be happy with the huge rally in the prices of cotton, one of its main raw materials, in the past few months. But the fibre has surely brought a lot of cheer to both commodity futures traders as well as the exchanges.

Since August 2010 when the cotton price rally began, both volumes and prices for Kapas, or cotton, futures contracts have surged multi-fold.

Traditionally, Kalyan Cotton, or type V-797 futures, is traded in India. NCDEX and MCX are the two commodity exchange platforms widely used for trading in Kapas futures.

The average daily volume traded on MCX increased from just 34 metric tonnes (mt) in August 2010 to 3,332 mt in January 2011, a rise of more than 9,000%, or 98 times. The daily average turnover has also increased from `11 lakh in August 2010 to `13.79 crore in January 2011, a rise of around 125 times.

Volumes jumped on NCDEX as well. The average daily Kapas futures volume, traded on the exchange in August 2010, were 2,640 mt, which has increased to 33,032 mt in February 2011, an increase of more than 1,000%, or around 12 times.

Kapas futures prices on NCDEX also rose from a daily average of `652.53 per 20 kg in August 2010 to `1,128.77 per 20 kg in February 2011, an increase of more than 72%, or 1.73 times.

Industry analysts said the high volatility in cotton prices, witnessed in the past few months, has led to this huge increase in trading volumes.

The price of Shankar-6 type cotton has almost doubled from `30,000 per candy in August 2010 to `60,000 per candy in February 2011. This is believed to be a superior type of cotton and forms a major part of the Indian cotton industry.

At the moment, the exchanges are allowed to trade only in Kalyan Cotton futures, while proposals are awaiting nod to permit Shankar-6 type cotton futures trading.

“Cotton prices have been very volatile this year. The production in the country is at an all-time high, but international prices are also high. Even though the production is high, hoarding is taking place at the intermediary levels of the value chains—especially at the ginners’ level. The hoarding is mainly in expectation of higher export prices. This has created an artificial shortfall,” said Madan Sabnavis, chief economist, Care Ratings.

“The increase in trading volumes on exchanges is thus due to the extreme price volatility, which is due to the global demand-supply mismatch,” he said.

“The main reason for the increase in trading volumes is due to price volatility. The high volumes could be for two reasons—first, traders who need to hedge contracts for exports and domestic contract reasons, and second, given the prices are high, there could also some profit booking,” said Vijay Kumar, chief business officer, NCDEX.

“The global cotton supply has been affected due to various reasons, including floods in Pakistan. The US arrivals will come only after three months. Thus, India is the only supplier available at the moment. However, the cap in exports is an issue. Further, there was a lot of speculation on the pent-up demand expected, once China, a major importer, restarts importing post after its New Year holiday. The rally witnessed in the past few weeks was also due to speculation over these imports,” said Vibhu Ratandhara, assistant vice-president, Commodity Research.