Cotton Prices Rising in Line with Fundamentals – Suspending Futures Trading Not Viable

The commodity markets regulator SEBI had suspended futures and options trading in a host of agriculture commodities including Chana, mustard seed, soybean and its derivatives, crude palm oil, moong, paddy (Basmati) and wheat for one year, in the latter half of 2021. Ever since, vested interests regarding demanding a ban on other agri-commodities have increased as well. 

The commodity exchanges have provided a hedging platform for every big cotton-producing and consuming nation, for ensuring better price discovery and risk management. Therefore suspension of futures trading of cotton will not be a welcome move at all. The recent rise in cotton prices is mainly due to demand exceeding the supply.

There is enough evidence for other banned agricultural commodities, which rule out the inference of excessive speculation in escalating the prices.

Time and again the studies have shown that the agricultural commodities have behaved in line with the key demand and supply factors only. Farmers are getting good prices for the produce after several years and any move to reduce import duty would impact their realisation making it difficult for them to realise their production cost.

If the futures contracts are not available for trading then the ginners will face a big challenge for the market price discovery. This implies that it will lead to wider price fluctuations in the trades. As a result, this may hit the operating margins of the ginners across the country.

The mill owners usually sell their yarn in advance to hedge their trade using cotton futures contracts on commodity exchanges and in case there is a ban on cotton futures trading then it will be difficult for mill owners to have a transparent assessment of their raw material price. India is the second largest consumer of cotton in the world after China, and has a strong demand for yarn in the export as well as the domestic market.