Cotton Ginners Voice Concern Against Ban On Futures Trading

Market Intelligence

Cotton Ginners Voice Concern Against Ban On Futures Trading

‘Small ginners will be put under pressure in absence of transparent price discovery platform’ The recent rise in cotton prices is driven by fundamental reason with the demand exceeding the supply and the entire clamour over demand for suspending the futures trading over price speculation is completely prejudiced, said the Madhyanchal Cotton Ginners and Traders Association. In a letter to Prime Minister’s Office and Piyush Goyal, Minister of Commerce & Industry, Consumer Affairs & Food & Public Distribution and Textiles, the Association said there has been a clamour demanding suspension of cotton futures by a section of value chain participants who do not want transparent pricing and thrive on price opacity. With half of the fibre produced in India is yet to arrive in the market, farmers would be the most affected by any move to ban futures trading. Over the years, farmers have started hedging on the futures market which had improved their profit margin. “Farmers are getting good price for the produce after several years and any move to reduce import duty would impact their realisation making it difficult for them to realise the cost. In absence of futures contract, market price discovery will be a big issue for ginners and will lead to huge variations in prices across the trade. This in turn will be detrimental to scores of small ginners operating across the country,” it said. In December, capital and commodity markets regulator SEBI had suspended futures and options trading in a host of agriculture commodities including chana, mustardseed, soyabean and its derivatives, crude palm oil, moong, paddy (Basmati) and wheat for one year. Ever since, vested interests have gained strength demanding ban on other agri-commodities also. This year, adverse weather condition at the time of cotton harvest had impacted yeild and production. Moreover, the low carry-over stocks and brisk demand had boosted prices, said the letter. The demand has remained buoyant on the back of recovery in spinning industry and shortage of cotton across the globe including the US, Brazil and China. Every big cotton producing and consuming county has a hedging platform for better price discovery and risk management. Suspending such a futures platform will separate India from the rest of the world, said the association in its letter. India is the second largest consumer of cotton in the world after China with strong demand for yarn in the export and domestic market. Typically, mill owners sell their yarn in advance to hedge their trade using cotton futures contract on commodity exchanges. “In the event of ban on futures trading, it will be difficult for mill owners to arrive at their raw material price in a transparent manner,” it said. Cotton spinners likely to report double-digit growth in revenues in FY22 Indian cotton spinners are likely to report double-digit revenue growth and all-time high profits in 2021-22, mainly driven by high demand and realisations, according to a report. While the growth is primarily being led by all-time high realisations, which have sustained for much of the year, volumes are also estimated to be better than the pre-Covid levels, the report said. Besides recovery in domestic order, robust growth in export demand has supported volumes, it added. Large and mid-scale spinning companies are expected to report robust double-digit growth in revenues and all-time high profits in FY22, with 400-600 bps improvement in operating margins, ICRA Ratings said in the report. Companies, which had higher stocks of lower-cost cotton from the previous season, benefitted more in terms of profitability in H1 FY22. This apart, the inclusion of all cotton yarn exports under Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from January 2021 onwards (as notified in August 2021) has also supported margins as well as price competitiveness of domestic spinners in the international markets, ICRA Senior Vice President and Group Head, Corporate Sector Ratings, Jayanta Roy said. Meanwhile, the report stated that the slight decline in December 2021 aside, cotton yarn prices remained on a rising trend in the current fiscal, touching all-time highs in recent months. In 9M FY22, Indian cotton yarn prices averaged 36 months higher than FY21. On the exports front, following a 5% growth in FY21 despite the pandemic impact, India's cotton yarn exports surged 47% year-on-year in H1 FY22, led by a 130% year-on-year increase in exports to Bangladesh. ICRA expects Indian cotton yarn exports to be at all-time highs in FY22, breaching the previous high recorded in FY14. "Besides competitive Indian cotton and cotton yarn prices in the international markets, concerns raised by large buying regions, including the US and the EU, on Xinjiang cotton and healthy growth in Bangladesh's apparel exports are driving export demand. While China remained the largest export market for Indian cotton yarn till FY21 despite a moderation in its share in recent years, Bangladesh has overtaken China this year, accounting for 40% share in H1 FY22," ICRA Vice President and Sector Head, Corporate Sector Ratings, Nidhi Marwaha noted. ICRA Ratings expects this demand to sustain for the next 9-12 months at least, she added. Even as the risk of subsequent pandemic waves remains, ICRA expects domestic spinners to sustain healthy volumes in FY23 as well, amid a shift in preference away from Xinjiang cotton and competitive domestic cotton prices. However, prices are expected to taper as cotton yarn realisations remain unsustainable at current levels, which may affect demand, it said. This, in turn, would result in some moderation in performance in FY23 from FY22 levels, with turnover likely to correct by 10-15%, though remaining higher than the pre-pandemic levels, said the report. Despite moderation from FY22 levels due to a possible decline in realisations, ICRA expects spinners' business performance to remain healthy and better than the pre-Covid levels in terms of scale as well as profitability in FY23. Considering this, the outlook for the sector is positive, Marwaha added. India’s Supima cotton imports rise 25% India’s imports of top quality Supima cotton from the United States increased last year to 2.19 lakh bales (480 pounds each) from 1.74 lakh bales in 2020, owing largely to leading US brands shifting their garment sourcing to India from China. Bruce Atherley, Executive Director of Cotton Council International, stated at a recent industry event that brands are becoming more responsible in their sourcing strategies as sustainability and transparency are no longer optional. Leading brands are mapping their supply chains all the way back to spinning mills and looking for reliable supply chain partners. RMG makers reluctant to switch to MMF Garment manufacturers, except a few, are reluctant to move towards man-made fabrics even though price of cotton yarn is hovering above Rs 350 per kilogram. According to sources, consumption of cotton yarn is around 700 tons per day in the garment industry in Tirupur. But, the entire consumption of man-made fabrics is 2,000 tons per year. One of the reasons for the reluctance to shift to MMF fabrics is the current set-up in the mills which are oriented for manufacturing and processing cotton textiles. Moreover, Tirupur is known for cotton knit apparel, and hasn’t received many enquiries for MMF based apparel. Though this can well be a chicken-and-egg situation. Among man-made fabrics, viscose is widely used but there are several concerns. Viscose is a delicate fabric, and many dyers claim that after dyeing the fabric loses strength. Besides, colour correction is a problem in man-made fabrics. In terms of shrinkage, cotton has 5%, viscose has 7%. If the dyeing isn’t proper, it increases to 12%.