Agri Business

Price volatility leading to more defaults in cotton contracts

L. N. Revathy Coimbatore | Updated on March 12, 2018

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The 2010-11 cotton season has set records in terms of prices and production, with the former showing abnormal movement both ways and estimations of the latter at 325 lakh bales. Large-scale defaults of contracts in both international and domestic markets add to the records.

Industry sources admit to contract defaults reaching an all-time high this season compared to the past, but were unable to quantify the defaults. “There are no reported figures. The Cotton Corporation of India (CCI) has estimated its default at 3 to 4 lakh bales, but many mills have negotiated and settled the issue. Apart from CCI, there are others and trade defaults could be quite significant,” a source said.

It may be recalled that cotton in India was sold at around Rs 30,000 on forward basis for delivery in December 2010 and when the prices skyrocketed to over Rs 62,000 in April 2011, a good number of sellers (mainly ginners) defaulted as they could not absorb the huge losses.

Cotton industry sources said that there were instances of a few buyers defaulting in the second half of the season when prices nosedived to Rs 30,000 in a short time of two weeks.

“Volatility has been the main contributor for such large scale defaults. There have been a record number of arbitrations this year,” the source said

These unavoidable situations appear to have created the necessity to work for a common contract for Indian cotton.

The newly elected President of the South India Cotton Association, Mr J Thulasidharan, said the association has been pushing towards drafting and implementing a common contract approved by the trade. “We are waiting for nod from the regional associations. The idea is to maintain sanctity of the contract.”

SICA's newly elected Vice-President (and former Honorary Secretary), Mr K N Viswanathan, said that due to the mounting defaults and disputes, the association was approached by the International Cotton Federation as well.”

While conceding that it would be impossible to have dispute-free trade, he said that a common contract would, to a large extent help control such issues as the views of similar trade bodies at the regional level would also be heard, discussed and debated upon before the draft is ready for implementation.

He also stressed the need for formulation of an import contract for cotton, adding, “Don't rule out imports at some point in time.”

Published on September 26, 2011

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