With global prices higher than at home, the limited allocations are commanding a premium.
Cotton quotas allotted to various exporters by the Director General of Foreign Trade (DGFT) are on sale in Gujarat, the biggest producing and trading state in the commodity.
As quotas were allotted to some with no prior experience in cotton exports, many of them are now offering their quotas to serious players at a premium or on a profit sharing basis.
The situation is somewhat similar to the grey market in the Initial Public Offering of shares. Retail investors sell their application forms or allotted shares to operators, for a charge. In the case of cotton, it is the quota allocated to applicants that are on sale.
Of 928 applicants (and 1.9 million bales) allotted a quota (on January 10) for exports, 672 got permission to export only 500 bales (a bale is 170 kg). Another 31 applications were allotted above 10,000 bales. It was in the interest of quota holders and traditional exporters to combine the lots and export, to save costs. A 10-15 per cent margin in exports made such sharing attractive.
A trader in Ahmedabad confirmed being approached by one such individual. “We have been contacted by an individual who offered us his quota of 500 bales for export to Pakistan. Surprisingly, he wasn’t even aware about the prevailing prices of cotton. He demanded 146 cents per pound for the lot, around seven per cent higher than our actual costing. This has become like share trading, where you pay a premium to buy shares in the grey market,” he said, requesting anonymity.
‘Want my quota?’
Echoing similar sentiments, S Stalekar, vice-president, cotton division, Sagar Group of Enterprises, said: “Taking benefit of the situation, non-traditional exporters charge a premium anywhere in the range of 2.5-10 per cent of the total value of export.”
“Those who do not have any experience or expertise in the cotton export market are now approaching serious players with offers to execute cotton quantities allocated to them. Even if they are paid 40 per cent of the margin, it is still lucrative, as margins are as high as Rs 4,000 per candy (356 kg),” said Arun Dalal, owner of the Ahmedabad-based leading cotton trading firm.
To make the licensing policy simple and transparent, DGFT had not included ‘’prior experience’’ as a pre-condition for people seeking the export permit. Apart from serious players, many non-traditional exporters applied and got the quota allocation. These included individuals, cotton testing laboratories, SMS service providers, companies engaged in solar energy solutions, chemicals and other agriculture commodities.
Marketmen alleged the allocation was improper in the sense that many non-traditional exporters got significant quotas, while some regular cotton exporting companies got less.
The rush for the permits was because international cotton prices are higher than domestic prices, offering certain profits. “The international prices are higher by 20-25 cents per pound, which has opened the avenue for huge profits for a normal exporter, too,” said an Ahmedabad-based cotton trader.
Cotton prices are 170-174 cents per pound in the international market, and 147-150 cents per pound in the domestic market.
