Sayed Shoeb Pens Winning Essay for ACSA International Cotton Institute

Today, we see a lot of seed cotton being moved from Maharashtra to Gujarat in order to get that extra premium for getting labeled as a Gujarat Shankar-6. In times to come when the buyers acceptability will be based on the HVI standards and not on the type name, we might see a reduction of such movements and a more homogenous pricing system.

With the option of delivering cotton from other origins, the issue of market squeeze can be avoided. Trading multiple growths as per the current standard makes it a very good sellers’ market. However, the buyers have little to celebrate. With no choice of selecting the origin for take-up, they have no option but to take delivery of whatever growth is being put on the board. As far as the buyer is concerned, this will be a vital question, since the quality that is being delivered on the board will be a mix of contaminated and contamination-free cotton.

Countries like India and Africa do not have machine-picked cotton, and this brings in a huge disparity in terms of quality as compared to Australian and Brazilian cotton. The Indian and African cotton will be traded at a discount, but the buyer will always be doubtful about the quality until he receives it. Moreover, the price gap is sometimes as wide as 10 cents between Australian and Indian cotton.

A mill which needs contamination-free Australian cotton will have nothing to do with the Indian cotton in case the seller delivers low-priced Indian cotton just because it was the cheapest available tenderable cotton at that time. This is not beneficial for the mills. At this point of time it seems fair to mills if only Brazilian and Australian cotton were selected for delivery to the exchange, as it would give more confidence to the mill buyers and would lead to an increased participation from their end. However, it is yet to be seen as to how the whole system develops before giving a verdict.

Trading Indian cotton on the international exchange comes with its own set of caveats. To date, the Cotton No. 2 contract has been a U.S.-based contract, and the USDA has taken great measures in assessing the quality standards that have been delivered. One hundred percent bale-by-bale HVI assures the delivery of right quality of every bale of cotton.

The Indian market, however, has not yet matured to that level. A two percent manual sampling is still the norm for physical trade. ACE came up with a set of rules for the sampling process of cotton bales for delivery, wherein the sample size is five percent. The homogeneity of the remaining 95 percent remains a question for which the seller has to give a legally binding indemnity to the warehouse at the time of deposit of cotton bales.

However, ICE cannot rely on such measures while trading internationally. Moreover, there is no standardization of bale size, weight and packaging globally. This needs to be addressed by the ICE, since every country has its own set of standards.

With the Indian and African cotton comes the problem of contamination and extraneous matters. The Growth PND needs to take these into account. A 100 percent HVI for delivery of Indian crop could make it very costly for Indian merchants and might not be a very good proposition. In case the HVI needs to be done in Malaysia, it would be very risky for the seller to ship the cotton all the way to Malaysia and, in case the bales get rejected, it would be an additional loss to the merchant. Therefore, it becomes very important to devise a system wherein the HVI testing for futures delivery could be done at the origin.

This brings in the question of tagging the bales for delivery and making sure that the ones that are getting tagged and tested are the ones that are actually getting delivered. ICE needs to develop a robust delivery and testing system in line with the ones that are being practiced in the U.S. like the EWR to make the contract a success.

An origin-based delivery might be helpful as far as HVI testing and tagging are concerned, but possible export bans by the Indian government render this option unviable. Therefore, more discussion needs to go into the delivery system before adapting one.

To conclude, the industry cheers and welcomes the new cotton contract, but only time will tell whether this contract is a success or proves to be another lost cause. The market participants do understand the importance of a world contract, and ICE needs to collaborate and understand the requirements of each and every participant. They also need to make sure that it is supported by large hedgers and, at the same time, should not suck out the liquidity from the Cotton No. 2 contract.

The key to a successful contract is to garner liquidity within the early stages of its launch, and to garner liquidity means to have the approval of the complete supply chain from the grower to the end user.

World cotton contract is the change that industry needs today, and I hope that ICE is successful in its endeavor.

 

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One comment on “Sayed Shoeb Pens Winning Essay for ACSA International Cotton Institute

  1. Paras mehta

    Excellent write up. A very comprehensive essay on necessity world cotton contract and it’s possible short comings.