Classroom Corner -- Demystifying a commodity -- Cotton

Kapas is the white fibrous substance in the cotton plant which, upon ginning, separates into lint and seed. Lint is the raw cotton utilised for making cotton yarn or thread and the seed is crushed for extraction of oil or used as fodder for animals.

Cotton crop requires rainfall of 50-100 cm annually. India is one of the largest producers and consumers of cotton in the world. Cotton is grown in the northern (Punjab, Haryana and Rajasthan), central (Gujarat, Maharashtra and Madhya Pradesh) and southern (Andhra Pradesh, Telangana, Karnataka and Tamil Nadu) parts of the country. Marketing support to cotton sellers is provided by cotton bodies such as The Cotton Corporation of India (Government undertaking) and Cotton Association of India (CAI). CAI represents all segments of the cotton trade and textile industry in the country. It maintains Indian cotton grade standards, fixes spot rates, offers cotton testing services and also publishes a monthly estimate of cotton crop, among other things.

Cotton futures

Cotton (ginned cotton) and Kapas (raw form) futures are traded on the MCX (Multi Commodity Exchange) and NCDEX (National Commodity and Derivatives Exchange) respectively. They are traded between 10 am and 5 pm, Monday to Friday. On MCX, one lot is 25 bales and the price is quoted per bale (of 170 kg) whereas on NCDEX, one lot is 200 maunds (of 20 kg each), that is, 4 tonnes and the price is quoted per 20 kg.

If you want to take position in cotton futures, an initial margin of 4-5 per cent is required. The margin requirement will vary and could be higher if the market is volatile. The contract can be settled in cash or physical delivery with the basis centre at Rajkot (Gujarat) for MCX futures and Surendranagar (Gujarat) for NCDEX contract.

Price drivers

Monsoon is one of the key factors that influence cotton’s price, particularly in India, as nearly 60 per cent of the cotton cultivated lands in the country are rain-fed.

The international demand and supply situation and closing stock in key producing countries also have an impact on cotton prices in the domestic market. For instance, China is one of the largest importers of cotton from India and the demand from China will influence the price of Indian cotton.

With inputs from Vinod TP, Analyst, Geofin Comtrade

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