HEDGING BY VARIOUS PLAYERS IN THE COTTON VALUE CHAIN
Farmer (kapas grower). He is exposed to the risk of a fall in kapas prices, whose prices are closely correlated to ginned cotton prices. To counter this risk, he can lock-in his price by selling cotton futures on a commodity exchange. Now, at the time of harvest, the farmer can close down the futures market position by buying cotton futures contract with a simultaneous selling of kapas in the physical market.
Ginner. A cotton ginner who holds raw cotton runs the risk of a price fall till the time of his intended delivery of ginned cotton. He can hedge against this risk by selling MCX cotton futures at the time of procuring cotton stocks for ginning. Later, he can close his futures market position by buying MCX cotton futures at the time of selling his ginned cotton in the physical market.
Spinning Mill. A spinning mill or a textile mill runs the risk of a price rise from the time of executing an order till it actually buys raw cotton/yarn. Here again, the miller can hedge against this risk by buying MCX cotton futures. Later, when he actually buys cotton/yarn from the market for processing, he can close his futures market position, that is, by selling MCX cotton futures contract. By taking position in the futures market, he can also avoid the carrying cost of keeping the raw material inventory.
Exporter. A yarn or bale exporter, who receives an export order of a certain quantity of cotton to be delivered three months later, runs the risk of a price rise between the time of receiving the export order and buying the required cotton stocks from the physical market. To counter this, the yarn or bale exporter could buy MCX cotton futures contract at the time of receiving the export order; later, he could close the futures market position by selling MCX cotton futures contract at the time of purchasing physical cotton stocks for export delivery.