Cotton farmers stay away from forward trading

Last year’s price swings in cotton have discouraged the decades-old practice of cotton farmers to selling their crop in forward deals before harvesting. This season, no forward deals have happened so far, due to heavy defaults and losses incurred by ginners and traders last year.

“The experience was not good in forward trading last year. That is why traders and ginners are not doing any,” said Rakesh Rathi, president, North India Cotton Association. Last year, prices started rising from July-end. From August, export possibilities and prices in international market were both rising. Cotton prices were around Rs 33,000 a candy (356 kg) and then rose to Rs 63,000 in six months.

During the course, especially from November to December, farmers preferred to default in honouring their forward deal commitments, as those deals were at quite low prices compared to the market prices. Ginners and traders that had purchased cotton in forward trades and then sold it to exporters also defaulted.

“People fear price fluctuations. Last year, about 1.6-2 million bales (170 kg) cotton forward trading contracts were cancelled or settled at a loss,” Rathi said. Those contracts that were registered with industry bodies were settled at 10-15 per cent losses.

“At present, domestic and international demand is low and requirement for the new season is not clear, as there is fear of slowdown. Hence, industry players are also staying away from buying cotton in forward deals,” said Saurashtra Ginners Association vice-president, Arvind Patel.

Most traders and ginners believe that entering into forward trading two to three months before crop arrivals is risky due to fear of price volatility amidst slowdown.

“Most of the forward trading was done at Rs 28,000-32,000 a candy in July-October last year, but the price increased to Rs 45,000 a candy at delivery. In such cases, sellers did not fulfill the orders to buyers and then buyers suffered losses,” said Arun Dalal of Arun Kumar & Co from Ahmedabad.

Now cotton prices are around Rs 34,000, but no one is sure if these would sustain.

Rajkot-based cotton trader Bipinbhai Bodar of Mahadev Trading Company, said “Most deals were cancelled last year. Only about 10 per cent forward trading commitments were fulfill. This time, no one wants to take a risk and as a result, no forward trading in cotton so far. Moreover, market is still not stable, everybody is interested in day-to-day business. In this situation there is no chance for forward trading in cotton.”