CAI Requests MCX to Prohibit Cotton Futures Speculation

Cotton Association of India (CAI) has expressed concern about alleged speculative trades on the Multi-Commodity Exchange (MCX) platform. CAI has flagged serious distortions in cotton prices causing speculative movements and asked the Exchange to take measures to prevent it, citing sharply lower open interest (OI) in MCX Cotton Futures for the May 2022 contract.

The CAI stated in a letter to the MCX that it had noticed that the May month cotton futures OI had dropped to less than 3,500 lots as of May 13, which is equivalent to 87,500 cotton bales (each of 170 kg).

"Considering that the Indian crop size this year is approximately 325 lakh bales, the MCX open interest for May 2022 is hardly a quarter percentage of the entire Indian crop size," CAI wrote in a letter dated May 13, 2022, and addressed to officials in the Union Textiles Ministry and the Ministry of Finance, as well as other cotton trade organizations.

According to the CAI, such a low OI and the existing higher exposure limit of up to 90,000 bales available to each participant at MCX were leading to daily speculation at MCX and cotton price galloping.

In futures trading, OI is a critical metric for assessing the active participants (buyers and sellers) on the platform for the specific commodity. It represents the total number of outstanding contracts held by market participants at the end of the day, indicating open buying or selling positions.

According to market participants, the cotton crop in the United States is estimated to be around 175 lakh bales, and the US ICE Futures contract has nearly 100 percent open interest, indicating mostly genuine buyers or sellers.

However, on the MCX, the OI has been significantly lower, leading cotton stakeholders to believe that speculators are constantly driving up cotton prices.

"Because MCX prices are the reference price for all ginners across India, this type of speculative activity at MCX has a very negative impact on the entire textile value chain," CAI stated in the letter. It also asked the authorities to take "immediate steps to avoid cotton price distortions."

On May 13, 2022, ginned cotton of 29 mm variety was quoted at Rs 99,500 per candy (each of 356 kg), up from Rs 46,400 on the same day last year. Cotton futures for the May 31 contract were quoted on the MCX at Rs 48,700 per bale, up from Rs 32,500 at the start of the year in January 2022.