MCX IPF PRESENTATION COTTON PRICE RISK MANAGEMENT

Transcription

1 MCX IPF PRESENTATION COTTON PRICE RISK MANAGEMENT

2 PRESENT COMMODITY EXCHANGE ECOSYSTEM VAULTS ComRIS COMMODITY DERIVATIVES EXCHANGE

3 ACTIVE COMMODITIES ON NATIONAL EXCHANGES & COMMODITIES TRADED AT MCX Permitted Precious Commodities Metals Energy Metals Agri & * Total Others SEBI Notified Listed at MCX NCDEX, NMCE & ICEX * Agri includes Cereals, Pulses, Oilseeds, Oil cakes, Spices, Fibres, Sweeteners, Plantation, Dry fruits & other non-farmer linked agri commodities, Chana COMMODITIES TRADED AT MCX

4 MCX IN INDIAN MARKET EXTENSIVE REACH (as on ) 669 Members 51,575 Authorized Persons 1,211 cities / towns across India Market share of % MCX: MARKET SHARE IN KEY SEGMENTS FOR FY17-18 (9M) Commodity Segment MCX Market Share in Indian Commodity Derivatives Proportion of MCX s turnover Precious Metals & Stones 99.92% 27% Energy 100% 32% Base Metals 100% 39% Agri- Commodities 15.58% 2% Q3 FY 2017 Q3 FY 2018 F&O AVERAGE DAILY TURNOVER (ADT) in Rs Crore 20,229 21, Futures Options* 19,500 20,000 20,500 21,000 21,500 * Option trading in gold contracts commenced on 17th October, 2017

5 HEDGING Hedging is a risk management tool, a sort of an insurance against adverse price movement. Hedging is a fairly simple process - Take exact opposite position to the physical exposure (which negates one another) making the company Price Risk Free. For Tender type sale orders For routine sales Undo rigidity of price in sale contracts via MCX via MCX via MCX Manage rising input costs Manage drop in input value To switch between fix to variable and vise versa Hedging ensures: Reduction in both risk and cost; Better cash management; Mechanism to identify, measure, manage & monitor risk; Protection to business margins - Improves ability to repay loans Efficiency and competitiveness. - Helps in better future planning WHY CORPORATE DO NOT HEDGE - Notion that it is SPECULATION, foul mouthed to be Satta. Tendency to book profits on the financial leg standalone (while it is a hedge) spoils discipline. Lack of awareness about the concept of hedging especially in MSME s. Conventional way of managing risk continues - built more on hope and trust. This explains why not many SME s see couple of rash economic cycles. Coming to the terms upfront margin plus additional margin due to daily M-T-M. This more of mindset issue. Lenders and Regulators have not yet stressed adequately on management of commodity price risk.

6 IMPACT OF COMMODITY FUTURES - SYNOPSIS OF EVALUATION STUDIES Impact Assessment Study of Cardamom Futures Trading - IIM Kozhikode (2014): Planter may be better off by selling his output in a futures exchange since, the chances of getting a better price for their high quality output is better. Study by Deloitte India (2013): Commodity futures market directly generates employment for around 1.5 millionpersonnel inindia 0.93% of India sservice sector labor force The Nielsen Company (2013): Assessing the Impact of Dabba Trading on Commodity markets in India The Dabba Market (trades outside the regulated markets) is more than 3 times of the trading through regulated Exchanges IIM Calcutta and NISTADS, New Delhi (2012): Mentha Oil futures facilitated rise of India as major exporter of processed mentha crystals transitioning from raw material exports. Tata Institute of Social Sciences (2012): Futures platform has ensured stable and fair prices for the SMEs. Fairer prices reduce the cost of production and import bill, boost growth of the SMEs and provide accurate demand-supply signals that reduce risks in SMEs. UNCTAD (2009): Number of intermediaries in Mentha value chain has reduced after introduction of futures market, reducing the price spread in the marketing channel from 11-12% to %. In case of Cardamom, it has helped to stabilize prices in the spot market. IIM Lucknow (2007): Potato and Mentha Oil markets showed substantial improvements in increased price realization to farmers during the period after the introduction of futures.

7 COTTON VALUE CHAIN, PARTICIPATION REACH & MCX COTTON SNAPSHOT Approximate Indian market size : 68,000 crs Annualized price volatility in : 19.3% & Exposure to price risk: More than 13,000 crs At MCX o Delivery for more than 6 lakh bales o 80% correlation with ICE prices o Contract specifications covers more than 75% of cotton grown in India o The market operational both morning and evening - price discovery when global markets are active Value Chain Ginners Exporters Brokers / Traders Millers Fund based Arbitragers (Cash & Carry) Financial Players Retail & HNI Jobbers Spreaders Other financial Exempted from paying Commodities Transaction Tax

8 PRICE VOLATILITY, CORRELATION WITH INTERNATIONAL MARKET & SPOT-FUTURES CONVERGENCE MCX (Rs. / bale) MCX Price ICE Price Price Movement (MCX & ICE) ICE (Cents/pound) Spot & Futures Price Convergence Rs. per bale 21,500 21,000 20,500 20,000 19,500 19,000 18,500 18,000 17,500 17,000 16, Nov Nov Dec Dec Dec Dec Jan Jan Jan Jan ,00,000 1,80,000 1,60,000 1,40,000 1,20,000 1,00,000 80,000 60,000 40,000 20,000 0 Jan 18 Volume in Bales Efficient price discovery depends on Exchange mechanism for spot-futures price convergence through physical delivery mechanism Jan '18 Volume (in Bales) Jan '18 Futures Rs per Bale Spot Rs per Bale

9 MCX Cotton Month Wise Volume and Interest MCX Cotton Month Wise Vol and OI Average Daily Volume (in Bales) Average Daily Open Interest (in Bales)

10 29 MM Cotton Contract Specification Parameter Price Quote Trading Unit Specification Rs./ Bale 25 Bales Tick Size Rs. 10 Contract Months Expiry Date Delivery Unit Delivery Logic Maximum Allowable Open Position Monthly - Oct to Jul Last trading day of month 100 Bales Compulsory Delivery At Client level - 3,60,000 bales At Member level - 36,00,000 bales or 15% of the market wide open position whichever is higher. For Near Month Delivery: At Client level: 90,000 bales. At Member level - 9,00,000 bales or 15% of the market wide open position whichever is higher. STAPLE LENGTH (mm) < Rejects to % Discount to No Premium / Discount to Premium 1% > 30 to 31 Premium 2% MICRONAIRE < 3.5 Rejects % Discount 3.6 to 4.8 No Premium / Discount % Discount > 4.9 Rejects TRASH 2%<= Trash <3.5% Premium Of Basis 3.5% > 3.5 to 5% Discount 1:1 > 5% Rejected MOISTURE Basis 8.5% Accept upto 9.5% Above 9.5% Up to 31-3 COLOR GRADE 1:1 Discount Rejected No Premium / Discount % Discount % Discount STRENGTH Minimum 28 Gtex

11 CALCULATION (INDICATIVE) FOR FARMERS / TRADERS Kapas Price 50 / Kg Approximately 500 kg of Kapas required for making 1 bale cotton (170 kg lint) 50,000 Kg Kapas Price (to make 100 bale cotton) (50*500*100) = 25,00,000 Ginning Charge (Charge to convert raw Kapas to bale cotton) 800 / bale Ginning Charge for 100 bale (800*100) = 80,000 Total Cost (Kapas + Ginning charge) (25,00, ,000) = 25,80,000 Cotton bale Price 21,000 / bale Cotton bale cost for 100 bale (21,000*100) = 21,00,000 Cotton Seed Price 20 / kg Cost of Seeds out of 50,000 Kg Kapas* (50,000*0.64*20) = 6,40,000 Total Value (Cotton bale + Cotton Seed) (21,00, ,40,000) = 27,40,000 Profit (Total Value Total Cost) (27,40,000 25,80,000) = 1,60,000 *Assumption (Outturn=34%, Seed = 64%, Wastage=2%)

12 COTTON HEDGING ILLUSTRATION Cotton Stockists Locks in Stock Price Cotton Exporter/spinners Locks in Purchase Price Date Physical Futures Oct - 201X Holding Stock Sell Futures Date Physical Futures Dec - 201X Has to purchase cotton Buy Futures Dec - 201X Sales at ruling price Buy Futures Mar - 201X Buys at ruling price Sell Futures Date Spot Price (Rs./Bale) Futures Price (Rs./bale of 170 Kg) Oct - 201X 18,500 Sell Dec 18,600 Dec - 201X 18,000 Buy Dec 18,100 Profit / (Loss) Net Selling Price Rs. 18,500 Date Spot Price (Rs./Bale) Futures Price (Rs./bale of 170 Kg) Dec - 201X 19,000 Buy Mar 19,500 Mar - 201X 19,500 Sell Mar 20,000 Profit / (Loss) Net Buying Price Rs. 19,000

13 DELIVERY WSPs (Yamada, Origo and Navjyoti Logistic) Cotton Delivery Weight Measurement Moisture Testing Delivery Location Rajkot STACKING Samples Drawn (5 Bales) Mundra Kadi LAB (WAKEFIELD) Lab Testing (5 Samples) Yavatmal Jalna / Jalgaon Adilabad WH Receipts Issued Goods Deposited Exchange Accredited WH Warangal Approximate cost for giving delivery of 100 bales Sampling & Assayer 's charges (per 100 bale) /100 bale Rs. 3,000 3,500 (excluding tax) Unloading & Stacking at Warehouse 22/bale approx. Rs. 2,200 Warehouse / bale / day Standard Deduction / day 0.35% 0.75% (based on month of deposit) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Deliveries (Bales) Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Nov-17 Dec-17 Jan-18

14 Month-Wise Delivery & Stocks Month-wise Delivery of cotton at MCX Platform Expiry date Qty (Bales) October 31, November 30, ,200 December 30, ,100 January 31, ,100 February 28, ,400 March 31, ,400 April 28, ,600 May 31, ,800 June 30, ,100 July ,500 Total (October 2016 to July 2017) 96,200 October 31, November 30, ,300 December 29, ,900 January 31, ,700 February 28, ,100 Stocks as on March 12, 2018 Stock eligible for Exchange Delivery 1,20,200 Stock in process for delivery 6,300 Capacity of warehouse 1,35,900

15 ComRIS (Commodity Receipts Information System) Issue Electronic WR & Confirm withdrawal / revalidation / stock confirmation for pledge In Progress Receipt Pledging Sampling & Testing / Grading activities Financial Institution Assayer WSP/ Vaults ComRIS CCL Client (Seller) Creating masters, Entities, Clearing & Settlement activities Initiate request for deposits, Revalidate, withdraw, transfer, Pay In Registered Entities ComRIS Participants Members / Clients Clearing Member Trading Member Warehouse Provider Assayers Financial Institutions Pledger Pledge / unpledge, invoke activities Client (Buyer) Accept / Cancel Transfer Requests 15

16 HOW CAN YOU PARTICIPATE ON MCX Choose the Member Broker Fulfill KYC at Broker level Arrange for minimum initial margin requirement o Update yourself on Mark-to-Margin requirements Know MCX regulations and byelaws Select the commodity/ product to trade Read the Dos and Don ts Know and distinguish among: o o o Brokerage and Transaction Charges Margins, Taxation and Stamp Duty Default Penalties and Arbitration

17 THANK YOU Multi Commodity Exchange of India Ltd. Exchange Square, Suren Road, Chakala, Andheri East, Mumbai Ph The Contents do not constitute professional advice or provision of any kind of services and should not be relied upon as such. MCX does not make any recommendation and assumes no responsibility towards any investments / trading in commodities or commodity futures done based on the information given in the website and any such investment / trade are subject to investment / commercial risks for which MCX shall not be responsible. If financial, investment or any other professional advice is required, please seek advice of competent professionals.