Commodity Calls

Query Corner

| Updated on March 10, 2018 Published on April 30, 2017


Price fluctuations for cotton yarn are high. What is the charge for cotton in futures transactions? Is it possible to get delivery of yarn in desired quantity/ quality?

Senthil Kumar, MD, MR Group, Tamil Nadu

NCDEX offers futures trading in cotton — V-797 Kapas (medium staple) contract, Shankar kapas 29 mm (long staple) and cotton bales 29 mm (long staple) contracts. At present, no contract is offered in cotton yarn and hence, deliveries on the exchange platform are not possible. However, the kapas and bales contracts can be used for managing the price risk. Fabric manufacturers, exposed to price risks, can mitigate their business risk by hedging using Shankar kapas and cotton bales contracts. With a transaction charge of only ₹10 on trade of ₹1 crore on these contracts, it is extremely cost-effective as well. You can approach your preferred broker to register as a client to begin hedging.

We manufacture edible oils and cakes. Presently, we hold cottonseed cake in physical form. We plan to sell it from May/June. Any signs of uptrend in cottonseed cake?

Arun Kori, Laxmi Mills, Haveri, Karnataka

Th price of cotton seed oil cake depends largely on the production dynamics of the primary source — in this case cotton or kapas. According to the Cotton Advisory Board, after production of 386 lakh bales (170 kg each) in 2014-15, cotton production fell in 2015-16 to 338 lakh bales. However, this is pegged to increase to 351 lakh bales in 2016-17, a marginal 4-odd per cent growth. But as per estimates by the Department of Agriculture, Cooperation and Farmers Welfare, cotton production for 2015-16 was much lower at 300 lakh bales. This pegs growth in cotton production for 2016-17 at about 8 per cent to around 325 lakh bales. Given expectations of rise in cotton production, prices of cottonseed oil cake have been depressed. The outlook is bearish near term for both cotton and cotton-seed oil cake. Since you manufacture oils and cakes, you could use futures contracts to hedge exposure. Whenever prices are expected to fall, you can sell the futures contract, to offset the loss incurred on sale of your stock in one- to two months’ time. Every futures contract will have an initial margin and other levies.

Published on April 30, 2017
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