For many years, Meister Media Worldwide has conducted an essay contest for students attending the ACSA International Cotton Institute, held annually in Memphis, TN. The contest is open to all members of the Institute class who choose to prepare and submit an entry focusing on a key topic of interest to the international cotton industry.
Sayed Shoeb of Noble Natural Resources India submitted the winning essay for the 2014 class.
The editors at Meister Media Worldwide congratulate him on this honor, and we are pleased to share his essay with the global cotton community.
World Cotton Contract – Blueprint to the Next Big Change
By Sayed Aamir Shoeb, Noble Natural Resources India
What started as the New York Cotton Exchange in the 1870’s is now trotting towards its first ever truly global contract, which heralds the beginning of a new era in cotton trading.
Scheduled to start in the fourth quarter of 2014, this contract will incorporate growths other than the U.S. With the major growths like India, Australia, Brazil, Benin, Burkina Faso, Cameroon, Ivory Coast and Mali added as the deliverable origins and the delivery points to include Australia and Malaysia in addition to the earlier U.S. delivery points, it opens a huge window of opportunity and will dare the traders to expand and alter their perspective of cotton trading.
However, before going live with the contract, a number of issues and details need to be chalked out and discussed in great detail to make this contract a success, especially the new deliverable origins.
Increased participation from the other parts of the world necessitates the presence of a global contract. India for long has been the second largest producer, as well as the second largest exporter of cotton to the world. In spite of having local domestic futures markets like MCX and ACE, they do not provide sufficient liquidity and have not been very ideal to provide the required hedge to the market participants.
With the introduction of the world contract and an option to deliver Indian cotton, we should see an increased participation from countries like ours in the global market, which, in turn, will increase the liquidity. Local merchants with deep pockets will be more confident in managing their position with a globally-traded risk management tool by their side, which will be highly liquid, giving them the option to give delivery to the exchange. It will also encourage such merchants to enter other markets and trade at a global level.
Especially with a country like India where the government plays an important role in governing the extent of export, it will be a great opportunity for Indian traders to enter foreign markets like Australia and Africa, managing the risk at the same time through the world cotton contract and diversifying their portfolio, giving them the option of switching crops in case of export bans. Moreover, with the introduction of two major southern hemisphere crops, we might see an increased participation on the October delivery month.
With the introduction of this contract, however, there could be a tectonic shift in the way cotton is handled and marketed now in India. If the contract is able to garner enough liquidity, it will push the Indian stakeholders to move towards international standards from the traditional marketing style.
Today, most of the cotton marketed in India is based on the earlier type sample names that have been adapted like Shankar-6, J-34, and Mech, etc. With the world communicating based on International standards, we might see these names getting obsolete in times to come. This would lead to standardization of cotton contracts and will remove the ambiguity between the quality sold and the quality delivered.
Today, the most famous Indian variety that is getting traded internationally is Shankar 6, which is mostly grown in the Gujarat region. This, as such, is a bit unfair to similar varieties of cotton grown in other parts of India like Maharashtra and Andhra Pradesh which trades at a discount to Shankar-6 because of its high demand, irrespective of the fact that the quality is just as same. The sellers in the Indian market will have a wider basket to choose from when delivering a 31-3-36 or any other deliverable HVI standard.