Multinational cotton traders eye arbitrage

With the global cotton crop estimated to fall 14 per cent in 2013-14, prices of the commodity have touched an 11-month high in international markets. Sensing an export opportunity, leading multinational traders have turned buyers of Indian cotton, leading to a rise in prices.

The International Cotton Advisory Committee has said in the next financial year, global production is estimated to drop 14 per cent to 22 million tonnes.

Rabo Bank said, “Soyabean and corn continue to limit cotton acreage, despite the current rise in prices.” It added the cotton crop in the US might fall 18 per cent. In the US, cotton is trading at an 11-month high of 88 cents a pound (0.45 kg). In India, at Rs 10,800 a quintal, the benchmark Shankar-6 variety is at its highest level since August 2012. MCX cotton futures stand at Rs 18,500 a bale (170 kg).

Eyeing arbitrage, many leading multinational trading companies from India have started buying and stocking the commodity for exports. This is because the Chinese government is forcing local mills to buy cotton from the state agency at prices significantly higher than international benchmarks. The Chinese state agency is selling cotton to mills in that country at $1.20-1.47 a pound. Chinese mills can import cotton as long as this is limited to half the local purchases. As these mills pay about 90 cents a pound for Indian cotton, it helps the mills reduce costs.

Multinational traders based in India have started buying cotton in the Indian spot market and selling domestic futures on the MCX or in international markets. They also export the commodity directly. Traders said they could record margins of up to two per cent through arbitrage. On condition of anonymity, an official at one such company confirmed the development.

It is estimated multinational traders have recently bought about a million bales of cotton.

State procurement agencies such as the Cotton Corporation of India and the National Agricultural Cooperative Marketing Federation of India are estimated to have stocks of about three million bales of cotton. This has also aided the rise in prices.

A total of 7.5 million bales are said to be registered with the Directorate General of Foreign Trade for exports. The Cotton Advisory Board has estimated in the current cotton year (October 2012-September), exports would stand at eight million bales. Any rise in exports would start pinching domestic mills.