The behaviour of cotton futures on the Multi Commodity Exchange of India (MCX) has surprised textile industry players with a section of them expressing concern over the developments.

The trade, in particular, is concerned over the huge difference between August, October, November and December futures, especially the huge premium for the near-term contract. 

According to MCX data, August cotton contracts on MCX are currently ruling at ₹48,600 a bale (170 kg) or ₹1.01 lakh per candy of 356 kg. October contracts are quoted at ₹39,250 a bale (₹65,450 a candy), November contracts at ₹34,300 (₹71,828) and December at ₹32,600 (₹68,268). 

‘A lifetime experience’

This means there is a difference of ₹35,000 between August and October futures, ₹30,000 between August and November futures and ₹32,000 between August and December futures. 

“I have never seen such a huge rate difference in my life. The ₹30,000 difference between August and November month is hard to believe. Also, the open interest in MCX is only 30,000 bales for the August contract with stocks in the exchange’s godown only 3,000 bales,” said Atul Ganatra, President, Cotton Association of India (CAI) - a body of cotton traders. 

Intercontinental Exchange (ICE), New York, October cotton futures are currently quoted at 103.99 US cents a pound (₹65,405) a candy) and December futures at 98.51 cents (₹61,908). MCX spot cotton price as of August 8 was ₹94,067, while spot prices in Gujarat for benchmark Shankar-6 cotton is currently ₹95,000.

Yarn buyers benchmark

“If you take into account the ICE benchmark futures in July and MCX cotton August futures, there is about 60 per cent premium for Indian cotton prices. International yarn buyers are quoting ICE July rates for importing from India,” Ganatra said. 

It is only recently that Indian cotton is being sold at a premium to New York ICE cotton. At least during eight of the past 10 years, Indian cotton was sold at discount, he said. 

“Current artificially high cotton prices in India are playing their own damaging role already in our export competitiveness across all products starting from yarn, fabric, home textiles to apparel,” said Prabhu Dhamodharan, Convenor of Coimbatore-based Indian Texpreneurs Federation (ITF).

“The problem is that this is a record high difference between these two exchanges — MCX and ICE,” said the CAI President.

MCX raises margin

“On MCX, huge speculation is going on. The futures need not result in delivery. So, every buyer or seller is playing a role in pushing up the prices,” said Anand Popat, Rajkot-based cotton, yarn and cotton waste trader. 

Ganatra said as the textile industry and spinning mills have to buy cotton based on the MCX rates but sell yarn in the export market based on ICE futures, they are forced to incur huge losses.  

Dhamodharan said the development comes at a time when the textile industry is undergoing a painful trend with low utilisation levels combined with operational losses. 

On MCX’s part, it has raised the margin for the August contract to 11 per cent from 6 per cent from August 8. It has narrowed the daily price limit for the August contracts in cotton to 2 per cent in a bid to curb speculation. There will be no further relaxation in the daily price limit, it said in a statement. 

July yarn exports down 70%

Ganatra termed as incorrect the contention that Indian cotton prices are reacting to the loss of the US crop in Texas and in China. Wondering why only Indian prices should increase, he alleged that cotton futures in the country were driven by pure speculation.

ITF’s Dhamodharan said Indian SME manufacturers of apparel need competitive and global raw material prices to compete globally. This is not happening going by the current trend in cotton prices.

Ganatra said in view of Indian cotton ruling at a premium, export of cotton, cotton yarn, apparel and garments have been badly affected. “As per one of the industry experts, our cotton and cotton yarn export dropped in July by 70 per cent and this is mainly because of higher rate of cotton,” he said. 

Hopes of robust crop

 Dhamodharan said a recessionary trend with low consumer sentiment is resulting in lower demand. “In turn, we are facing a hyper-competitive environment in all developed markets in the fashion space,” he said. 

Only two things can help the textiles sector, the ITF convenor said, adding that the expectation of a robust Indian cotton crop with good quality was one. “Our own survey says it is a very much possible scenario (robust crop with good quality) in the upcoming season,” he said.

 Secondly, the removal of import duty on cotton permanently will offer the industry a level-playing field with other competing countries. “Farmers are well protected with robust domestic consumption and a good hike in minimum support price (MSP),” he said.

For the current crop year (July 2022-June 2023), the Centre has raised the MSP for cotton to ₹6,080 from ₹5,726 a quintal for the medium staple variety. Currently, the net weighted modal price (the rate at which most trades take place) for cotton across various agricultural produce marketing committee (APMC) yards is ₹10,621 a quintal.

Cotton prices have been ruling at least over 60 per cent higher than the MSP during the current season to September in view of the crop being affected due to unseasonal rains in October-November last year. 

Exports at standstill

According to the Cotton Committee on Production and Consumption, cotton production this year is estimated at 340.62 lakh bales. The CAI, however, has pegged it lower at 315.32 lakh bales. The estimates are against last season’s production of 352.48 lakh bales. 

A major reason for Indian cotton prices topping ₹1 lakh a candy in May and June is the crop quality got affected by the unseasonal rains. Quality cotton had commanded a premium throughout the reason, with domestic prices ruling at a premium to ICE benchmark futures. 

“Even at this premium, which has increased to 50-60 cents, stocks are not available,” said Popat. 

A fallout of the high domestic price is that exports have come to a halt. Till now, India has exported 40 lakh bales and not much cotton is expected to be shipped out until the season-end in September. This is against exports of 77.59 lakh bales last season.