Home > Cover Story

EICA plans major campaign to involve mills, ginners in cotton futures trading
Arbind Gupta - Mumbai

The East India Cotton Association (EICA) will be roping in mills and ginners in order to boost trading of cotton futures in the country. The Mumbai-based cotton trade body has decided to start a nationwide campaign along with industry associations for promoting Indian Cotton Contract (ICC) through an active participation by the consuming industry.

Significantly, the EICA is planning to introduce on call contract to ensure price as well as quality management tools into the existing hedge contract system. The proposed system will enable mills to take deliveries of specific grade of cotton at specific premiums and discounts in relation to the basis variety.

It may be noted that mills so far has been shying away from futures trading due to lack of availability of quality management component in the current concept. EICA has already sent a proposal to the Forward Markets Commission (FMC) for the introduction of on call contract.

"This benefit will be complementary to the benefits of the normal futures contracts. And we are sure that the FMC which has agreed in principal, will soon give its formal nod to commence on call contract," an EICA official said.

What is on call contract and how is this going to benefit the mill sector? A mill generally knows that it needs specific cotton grades at later dates. But in the absence of forward yarn or cloth sales, or lack of storage space or for want of adequate finance, it may not want to take the cotton delivery immediately. It may have no definite opinion on what cotton will basically be worth later on or may expect cotton prices to fall. In such cases, it may prefer to buy cotton on the basis of on call contract wherein the mill enters into a deal with a merchant for delivery of specific grade of cotton to be paid for either at premium for a better quality or discount for inferior quality over the price of a stipulated future contract.

Thus, an on call contract is entered into by a mill without determining the final price at the spot. The mill, however, has a firm opinion of the relative value of the specific grade of cotton it needs, and therefore fixes the premium or discount for such cotton. But in expectation of a lower absolute level of price, it prefers to have the actual price undetermined until a later date.

"The obvious advantage of the on call contract to the mill is not difficult to see. Not only does it ensure the necessary supplies of specific grades and staples of cotton required by the mill, but it also gives sufficient time and opportunity to the mill to shop around for more attractive bargains for sale of cloth/yarn so as to yield handsome profit," said an expert.

While the on call operations of mills send a clear signal to the cotton growers of the types of cotton in demand and thereby facilitate them to grow varieties required by the mills, a cotton futures market can assist the farmer in even selling their crop at a fixed premium or discount (depending on the quality and variety of his crop) in relation to the futures price.

"The success of the whole thing will depend upon as to how mills respond this change. In fact, mills will have to be proactive in their approach and will have to take advantage of the risk mechanism that is available," stated the official.