RISK RISING FAST IN COTTON1 finallll

8/7/2019 RISK RISING FAST IN COTTON1 finallll

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31STJANUARY, 2011


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GROUP MEMBERS-yAbhishekh Chavan - 11

y Mehul Maniar - 42

y Istekhar Shaikh - 73


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Introductiony Gujrat is the largest cotton producer city in india.

y Cotton is used to make a number of textile products. These

include terrycloth for highly absorbentbath towels and robes; denim for blue jeans; chambray, popularlyused in the manufacture of blue work shirts (from which we getthe term "blue-collar"); and corduroy, seersucker, andcotton twill.Socks, underwear, and most T-shirts are made fromcotton.

y Bed sheets often are made from cotton. Cotton also is used tomake yarn used in crochet and knitting. Fabric also can be madefrom recycled or recovered cotton that otherwise would bethrown away during the spinning, weaving, or cutting process.


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y RISKS RISING FAST IN COTTONNIDHI NATH SRINIVAS MONDAY JANUARY 31, 2011, 09:36AM

y Indias cotton market is in a race against time. There is an urgency to buy. There is an urgency to shipout cotton. And there is an equal rush within government to increase the quantity that can be

exported.Prices crossed a record Rs 50,000 for a candy this week. At the bottom is greater panic in New York.Traders in New York are willing to pay $1.68 for a pound of cotton in March. But they wish to pay $1.54for it in July. Thats a 14-cent difference. Converted into rupees, in March, cotton is worth Rs 59,964per candy on the world market. By July, it fetches Rs 54,970. Goodbye to almost Rs 5,000.

Clearly, bales shipped in March will be more valuable than those shipped later. Exporters allowed tosell 1.9 million bales in January immediately benefit. And the bonanza will become part of folklore ifgovernment fattens the goose further. The commerce ministry is ever keen to play fairy godmother.

Unfazed by opposition from the textile ministry, the commerce secretary himself is pitching foraddition of 1.5 million bales to export quota. As it usually takes a month after the decision forshipments to start, if exporters are to make maximum money, the moment is now or never.

Thats why all eyes are on the meeting of the committee of secretaries next week. If the committeedevelops cold feet and postpones the decision to March, the groans will be heard all the way to NewYork.

Meanwhile, commerce has sent spinning mills to the ball. Perhaps thats because it understands solittle of the business. Or just a desire to be even handed. Spinners were allowed last week to export

yarn made from imported cotton. There is no restriction on quantity. There is no stipulation to onlyuse cotton imported henceforth. Nor is a correlation necessary between the quality of cottonimported and yarn exported.

Sitting on the worlds cheapest cotton, no spinner has the wildest chance of finding Chinese buyersfor Indian yarn made from expensive American or Egyptian cotton. It wont even recover the makingcharges. Even commerce should have found that deal hard to swallow.


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y

The upshot is that mills which routinely import up to 5 lakh bales extra long staple cotton annually forsuperfine cloth can now use it as an excuse to export yarn made from ordinary desi cotton. Their existing yarnexport quota is extra. Cinderella never had it so good.

All this still doesnt explain why 7 million bales (if you add that extra 1.5 million to the original limit of 5.5 mn)should have enough power to pull up the five times larger Indian market of 33 million bales. Its after all theexportable surplus, the cotton India doesnt need. There ought to be plenty left. Surely correction isinevitable.

But for once the tail seems indeed to wag the dog. Between exports and scurry to secure raw material,spinners and weavers too are caught in buying frenzy. Government-owned Cotton Corporation of India aloneplans to trade 3 million bales for profit.

Record prices can turn a self-fulfilling prophecy. And thats really the biggest danger today. Everyone is sobullish that no one is hedging risk. Or cant. Normally, when a company hopes physical market will rise, itbets on prices falling in futures trading. That evens out profit and loss and the business is hedged. No more.Multinational trading companies are scalded. They bought large quantities of Indian cotton.

To offset that, they bet on prices dropping on New Yorks ICE exchange. They never expected futures to rise bythe maximum permissible limit for days in a row. The consequent margin calls have wiped out profit in theIndian market.

Local traders and ginners are using personal cash, without a semblance of risk management. If the marketcorrects, they are bankrupt. Textile companies are no better. They use bank finance to buy raw material. But

they remain equally exposed to inventory losing value and messing up credit lines. Most dont use futures forhedging. Their bankers ought to be extremely worried right now. Ditto their equity investors. It has become ineveryones interest to keep cotton prices high farmers, traders, spinners, exporters and CCI. Thats anexplosive situation.

Exceptional rewards come hand in hand with exceptional risks. You cant take one without the other. How farcotton rises is not important. Will it boomerang on our faces is the real question now.


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BAN ON COTTON EXPORTy The textile ministry has put a ban on exports of raw cotton

through suspension of registration from April 19 for anindefinite period, though the textile industry has been

demanding it for a long time to contain spiralling cottonprices in the domestic market.

y Cotton prices in the domestic market is already up byaround 35% at Rs 30,000 per candy (170 kgs make onecandy) and the ban at this stage would hardly make anydifference to domestic prices, Nangalia, convener ofTelevision 2010 said.


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Reasons on bany India's decision to ban cotton export until further

notice will raise prices of cloth in Britain and otherparts of the world, according to retailers andmanufacturers in London .

y India is the second biggest grower of cotton after theUnited States. Cotton prices have been gone up sharply

by a mixture of roaring demand from China, a cropwipe out caused by rains in India, besides higher costsof fertilisers, seed and transport fuel, industry sourcesbelieve.


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Effects -y NAGPUR: A ban imposed on cotton exports by the Central

government has led to a steep fall of around Rs 500 perquintal in cotton prices, causing panic among cotton

growers in Vidarbha, one of the largest cotton-growingregions of the country.

y If the ban is not removed, farmers may have to think ofshifting to other cash crops in this sowing season, sinceopen market prices are expected to fall further during theprocurement season.


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EFFECTS OF BAN ON EXPORT.y There is an equal rush within government to

increase the quantity that can be exported.

y Local traders and ginners are in danger.

y

Use bank finance to buy raw materials.

y So cotton prices are high.


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y List of Completed Market Yards

y List of Market Yards which could not completed and

bills have not been submitted upto 31st March, 2010y Proposals Pending for Development of Market Yards

as on 31.01.2008


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Other Possible solutionto meet Demand and Supply

y Development of short duration, high yielding, disease andpest resistant varieties/hybrids with appropriate fibreparameters to meet the need of the textile industry.

y Development of integrated water and nutrientmanagement practices for cotton and cotton basedcropping system.

y Development and validation of Integrated PestManagement Technology for different cotton growing areasof India to improve yield and reduce the cost of cultivationto ensure better net return to the cotton growers.

y Technology Transfer through demonstration and training.y Supply of delinted certified seed by setting up of delinting

units.y Accelerating Integrated Pest Management activities.y Providing adequate and timely information input to the

farmers periodically.


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Recommendations-

India should relaxed export controls subsequently asgood monsoon rains have raised prospects of higherlocal output and stable prices.

India is likely to produce 32.5 million bales of the fibre

in 2010/11, up from 29.5 million bales in 2009/10.India is the second-biggest producer of cotton so there

will be huge demand of cotton for export.


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Conclusion

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RISK RISING FAST IN COTTON1 finallll