English Kapas

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MCXIn dia 's N o.1 C om m od ity E xc ha ng e

Multi Commodity Exchange of India Ltd (MCX) is a demutualised exchange with permanent recognition from thegovernment of India. MCX offers futures trading in 56 commodities including bullion, energy, grains, plastics, metals, oiland oilseeds, fibres, spices, pulses, sugar, plantations and carbon credits as on March 31, 2008. The average dailyturnover on the MCX platform was Rs. 102,827.60 million during fiscal 2007-08.

www.mcxindia.com For private circulation only

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I NTRODUCT ION> Kapas (also known as raw cotton or seed cotton) is unginned cotton or a white fibrous substance (lint)covering the seed that is obtained from the cotton plant (GenusGossypium).

> Ginning is a process, which separates the lint (about 1/3rd in weight) from the seed (about 2/3rd inweight). Lint, which is commonly know as rui in Hindi, is the raw material for making cotton yarn orthread, which is further weavedto make fabrics.

H IS TO RY A ND P RIM E E CO NO MIC P OS IT IO N O F C OT TO N> Cotton was cultivated in India and Pakistan and in Mexico and Peru 5,000 years ago. In these twowidely separated parts of the world, cotton might have been grown wild. Then people would have learntto cultivate cotton plants in their fields.

> Cotton is perhaps the single commodity that has powerful influences on the political, economic, andsocial lives of the world. The importance of this crop can be felt in its complex history of rural land andurban industrial development. Because of its universality, the price of cotton wields enormous influencein the world economy.

> Cotton's primary economic position and the impact of cotton pricing help explain the significant role of acotton futures exchange. The arena of cotton pricing, (i.e., the cotton futures exchange),therefore, playsa major role in the history of this commodity.

PRO PERT IES > Cotton is the most important of all natural fibers, It accounts for half of all the world fibers used by thetextiIe industry.

> Cotton has manyqualities that make it the best choice for countless uses.> Cottonfibers have a natural twist that make them so suitable for spinning into a verystrong yarn.> The ability of water to penetrate right to the core of the fiber makes it easy to remove dirt from thecotton garments and creases are easily removed by ironing.

> Thecotton fabric issoft and comfortable to wear close to skin because of its good moistureabsorption ability. Chargesof static electricity do not build up readily on the clothes.

The following flow chart represents the cotton value chain.

Cotton Value Chain

Hand picking (70%) ormachine picking (30%)eed cotton

Cotton seed Produced in "bales"; oftentransported by container

Produced in "roils", soldon the basis o f length;often, tailor made to texti lefactory's needsCotton seed cake(world 's 2nd majorl ivestock feed)

Cotton seed oil(world's 5th major

edible oil ) Cotton yarn

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c r u d e o il , g o ld ,a n d c o p p e r inf u t u r e s t r a d in g .

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GLO BAL SCE NA RIO > The world cotton production area is around 34-35 million hectares and the production is about 25.1million tonnes (115 million bales).> The biggest cultivators of cotton are America, India, China, Egypt, Pakistan, Sudan, and Eastern Europe.China, the USA,and India are the three largest producers of cotton.

> The USA has a considerable share in world cotton exports. China fell short of their domesticrequirements and net importer. India exports about 4.7 million bales of cotton.

> China leads among the consumers, followed by India, Pakistan, the USA,and Turkey.> Overthe past few years, the worldwide cotton consumption has accelerated, increasing at around 4.5%per year, significantly above the long-term growth rate.

> There are specific reasons for an increased cost competitiveness of cotton:(a) The adoption of GM varieties has reduced the cost of production in many countries and increased

the availability of low-cost cotton fiber to mills.(b) High cost of competing synthetic fibers due to high-oil prices is the main input into the polyester

production, which has maintained polyester prices above those of cotton and improved the cottoncompetitiveness in the world clothing and textile markets.

(c) There is relocation of clothing and textile production units to China, India, and Pakistan.> The global cotton demand is likely to be stronger in foreseeable future. The global cotton demand isestimated to be at 118.9 million bales against the estimated global production of 114.8 million bales.The demand and production mismatch has raised the world cotton price.

> The world stock:use ratio forecasts to fall (from 39.7% to 38.2%) in 2007, lowest in the last 12 years.> The UScotton prices remained low in 2006 due to high carryover stocks but a sustained global demandis likely to put an upward pressure on the UScotton prices.

D EM AN D A ND SUP PLy The following table and pie charts represent the world cotton production and consumption, as per the latestICACreleasedated March1,2007 andCCI(estimated stock adjustmentofO.3 million metrictonnes).

World Cotton Production and Consumption (In million m)Year beginning August 1 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07World beginning stock 9.63 9.27 11.88 9.96 9.30 11.97 11.91World cotton production 19.40 21.50 19.30 20.71 26.30 24.67 25.34World cotton consumption 19.76 20.20 21.33 21.59 23.53 24.97 26.00World cotton exports 5.75 6.47 6.65 7.24 7.08 9.80 8.65World ending stocks 9.27 10.50 9.96 9.23 11.97 11.91 11.56

World Cotton Production (2006-07) (as per USDA and ICAC)

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World Cotton Consumption (2006-07) (as per ICAC)

EastAsia & CIS Others USA

7%EU& Turkey

8%Brazil3%

14%

IN D IA N S C E NA R IOIndia, with an estimated annual production of 27 million bales during 2006-07 (1 bale = 170 kg), is thethird largest cotton producers in the world. India also has the largest area under cotton production (9.25million hectare) and produces around 18% of the world's cotton from 25% of the area.The CottonAdvisory Board (under the ministry of textiles) estimates India's cotton production in 2006-07at 270 lakh bales.Despite having the largest area under cotton in the world, India ranks third in the world output of cotton.In India, the yield of cotton is estimated to be at 503 kg against the world average of 734 kg perhectare.Although cotton is cultivated in almost all the states in the country, Maharashtra, Gujarat, AndhraPradesh, Madhya Pradesh, Punjab, Haryana, Rajasthan, Tamil Nadu, and Karnataka account for morethan 95% of the production area.In India, cotton is sown during March-September and harvested during September-April. The peakmarketing season for the crop is during November-March.Cotton is the most important raw material for India's Rs. 150,000 crores textile industry. It accounts fornearly 14% of the total national industrial production, 4% of the GDP contribution, and providesemployment to over 15 million people.It also accounts for more than 27% of exports, making it India's largest net foreign exchange industry.India earns the foreign exchange to the tune of US$10-12 billion annually from exports of cotton yarn,thread, fabrics, apparel, and made-ups.Cotton accounts for more than 75% of the total fiber that is converted into yarn by thespinning mills in India and 58% of the total textile fabric materials produced in the country.Use of Bt and other new hybrid seeds, together with the farmers' belief in making investments in thissector, have increased the yield per hectare byabout 55%.India's cotton consumption has increased to 28% between 2002-03 and 2005-06, from 169 lakh balesto 217 lakh bales and now to 235 lakh bales in 2006-07.Cotton is very high on demand in China. Exporters hope to cash in on China's voracious appetite forcotton to meet its growing textile demand.Despite 10% higher production estimates in India, cotton prices are expected to remain firm due to itshigher fiber consumption in domestic as well overseas and lower production in the US, Pakistan, andChina.

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T h e a v e r a g ed a i l y t u r n o v e r

o f M C X i sU S $ 1 .9 b i l l i o n .

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The following table represents the total supply and demand of cotton in India.

Cotton Supply and Demand in India(as per CABon March 9, 2007)

(In lakh bales of 170 kg each)2004-05 2005-06 2006-07

SupplyOpening stock 21.00 72.00 56.00 -Cropsize 243.00 244.00 270.001- -- ~Imports 12.00 4.00 6.00Total availability 276.00 320.00 332.00

DemandMill consumption 163.00 182.00 205.00 ~Small-mill consumption 17.00 20.00 20.001-- --- ~Non-mill consumption 14.00 15.00 15.00Total consumption 194.00 217.00 240.00

Exports 10.00 47.00 48.00Total disappearance 204.00 264.00 288.00Carry forward 72.00 56.00 44.00

The following table represents the total cotton production area, production, and yield in India.Cotton Production in India2006 - 07 2005 - 06

State Area Production Yield Area Production YieldPunjab 5.88 26 752 5.57 20 610-- ~ -aryana 5.33 17 542 5.83 13 3791- - -Rajasthan 3.50 8 389 4.71 11 397

North total 14.71 51 589 16.11 44 464Gujarat 23.90 93 662 19.06 89 794I~ - ~ -aharashtra 31.24 52 283 28.75 36 2131- - -1- ~Madhya Pradesh 6.30 18 486 6.20 18 494I~ -1- -ndhra Pradesh 9.62 32 565 10.33 32 527I~ - -- ~Karnataka 3.70 6 276 4.13 6.5 268I~ - -1- ~Tamil Nadu 1.33 5 639 1.40 5.5 668I~ -.- -1- ~Others 0.78 1 218 0.79 1 215

Total 258 232Loose lint 12 12

Grand total 91.58 270 501 86.77 244 478Note: Area in lakh hectare: production in lakh bales of 170 kg each: yield kg per hectare

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M C X n o wr e a c h e s o u t t oo v e r 3 8 0 c i t i e sa n d t o w n s w i t h

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F A C T O R S IN F L U E N C IN G T H E M A R K E T > World production, consumption, import, export, and ending stocks> Demand of man-made fibers> Monsoon affecting production and growth> Insects and pests attacks> Stock with the procurement agencies, ginning units, etc.> Fluctuating acreage in various states due to crop shifting> Demand from ginning and textile industries> More than 80% of the cotton produced is consumed by March 31 every year,and the price starts firmingup from April and starts easing only in September when the newcrop starts arriving in the market

> Minimum support price (MSP) for cotton crop of certain varieties, sometimes with additional droughtrelief

> The Government of India fixes the MSPfor cotton. Several government agencies like Cotton Corporationof India, Maharashtra State Cooperative Cotton Growers' Marketing Federation procure cotton at theMSP set by the government. This sets the trend for the price initially. But the industry involves a largenumber of players and the market forces determine the price soon.

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M C X C o m d e x isIn d i a 's f i r s tc o m p o s i t ec o m m o d i t yf u tu r e s p r i c ei n d e x .

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C O N T R A C T S P EC IF IC A T IO N S O F K A P A S

SYMBOL KAPAS-escription KAPASMMMYVCONTRACT AVAILABLE FOR TRADINGApril contract From 10t August of the previous year to ao" Apri l of

the next year.TRADINGTrading period Monday through Saturday -Trading session Monday to Friday: 10:00 a.m. to 5:00 p.m.

Saturday: 10:00 a.m. to 2:00 p.m.Trading unit 4 MT (200 maund of 20 kg each)Quotation/base value 20 kgPrice quote Ex-Surendranagar (excluding all taxes, levies, sales

tax/VAT, as the case may be)- -ick size (minimum price movement) 10 paisa-Daily price limit 3%- Initial margin 4%- -pecial margin In case of additional volatility, a special margin atsuch other percentage (as deemed fit) will beimposed immediately on both the buy-side and thesell-side in respect of all outstanding position, whichwill remain in force for the next two days. Afterwhich, the special margin wil l be relaxed. ~Maximum allowable open position For individual clients: 20,000 MTFor a member collectively for all clients: 25% of theopen market position-DELIVERY

Delivery unit 4 MT (200 maund) with tolerance limit of +/- 20 kg.The tolerance limit of each maund would be 250 g.However, the exchange reserves its right toalter/change the tolerance limit, in case it deems fitand proper.- -Delivery center(s) Within 50 km of the municipal limit of Kadi,Viramgham, Lakhtar, Limdi, Surendranagar, andBawla.

Tender and delivery period margin 25%Variety of kapas Fa ir average Kalyan Cotton of Gujarat 13

variety and (or V 797 variety), which can be eitherhand-made or machine-made- -Delivery standards Unginned and unpressed raw kapas bundled as perspecifications given by MCX

Quality specifications Delivery samples must be certified by surveyorsapproved by MCX, confirming that the sample underreference pertain to the basis of quality as specifiedabove.Proportion of cotton: Seed in the kapas shall be in40:60 ratio. Ifthe ratio of cotton is within 2%tolerancelimit (between 38% and 42%), it is acceptable without

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M C X h a s d u a lIS O c e r t i f i c a t io n :f o r o p e ra t io n a lq ua lity a ndi n f o r m a t i o ns e c u r i t y .

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Bandhani or price ceiling/floor limits forthe life contract

any premium or discount. If the proportionof cotton ismore than 42%, the seller would get a proportionatepremium on every percentage. If the proportion ofcotton is lessthan 38%, the seller would besubject toa proportionate discount on every percentage. If thepercentageis below36%, it is rejectedat the buyer'soption.Refractionwill beacceptable upto 20 kg per4 MTofkapas.---Refer to the relevant circular released afterlaunching of the contract.

DELIVERY AND SETTLEMENT PROCEDURE OF KAPAS~ Tender notice/delivery pay-in ~Theseller will issue a tender notice on a tender dayand submit the warehouse receipt and qualitycertificate issued by a quality certifying agencyduring the tender period.-25% on the marked quantityelivery period margin

-Delivery allocationDateRate

Delivery pay-inDelivery pay-outPay-inof fundsPay-outof fundsDue date rate (DDR)

Ontender daysAt the closing rate on tender daysDuring the tender period by 6:00 p.m.E+3 working days by 11:00 a.m. (E= expiry date)E+2 working days by11:00 a.m.E+3 working days by11:00 a.m.

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-DeliveryorderTheexchange shall take spot prices from a panel ofspot prices from different entities from spot marketand shall compute the daily average price. The DDRis calculated on the last day of the contractmaturity byway of taking the simple average of lastfive daysspot price.

--------------------~I-- ~A delivery order will be submitted in the specifiedformat giving details of members/registered non-members who shall perform the delivery. It will beaccompanied by a valid warehouse receipt, invoiceand a good delivery quality certificate from theexchange designated certifier as per the contractspecifications.- - - - - - - - - - - - - - - - - I " ~ - - -Within 50 km of the municipal limit of Kadi,Viramgham, Lakhtar, Limdi, Surendranagar, andBawla.

----~I- --The buyer does not haveany option of choosing theplace of delivery and will have to accept thedelivery as per the allocation made by theexchange.- - - - - - - - - - - - - - - - - - - 1 -

-Delivery center(s)-Buyer's option for lifting of delivery- Deliverygrades -embers tendering the delivery will have the

option of delivering such grades of goods aspermitted by the exchange under the contractspecifications. The buyer will not have any optionto select a particular grade, and the deliveryoffered by the seller and allocated by theexchange shall be binding on him.

.-~ -All outstanding positions on the expiry of contract,not settled by way of delivery in the aforesaidmanner, will besettled as per the DDR.

- Close-out of open positions and penaltyon defaulter

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The members will provide appropriate tax forms,wherever required, as per the law and ascustomary, and neither of the parties willunreasonably refuse to do so.-----~--ll other charges, levies, or APMC cess applicableat the delivery center will be on account of thebuyer.The seller will pay sales tax or VAT,whicheveris applicable. The seller will issue an invoice in thename of the buyer, reflecting the sales tax or VATpaid by him. On receipt of the invoice, the exchangewill debit the account of the buyer to the extent ofsales tax/VAT and credit the same to the seller.Incase of an inter-state movement, the buyer has tosubmit requisite forms or pay CST,as applicable.Post-lifting delivery and all other charges are bornebythe buyer.-------1-

Legal obligation

-Taxes,duties, cess and levies

-Warehouse, insurance andtransportation charges-xtensionof delivery period

General provisions of business rules and decisionstaken by FMC, board, and the executive committeein respect of matters specified above will applymutatis mutandis. The exchange may furtherprescribe additional measures relating to deliveryprocedures, warehousing, quality certification,margining, risk management from time to time. Incase of any interpretational dispute or clarifications,the decision of the exchange shall be final andbinding on the members and others.

-Borne bythe seller up to the pay-out date.Borne bythe buyer after the pay-outdate.--------~~I-- ~As per the exchange decision due to a forcemajeure, or otherwise

Note: Pleaserefer to the exchangecirculars for the latest contract specifications and delivery and settlementprocedures.

Applicability of business rules

For Customer Support: +91-22-66494040To get the latest futures price of a commodity, sms "MCX " to 55454Exchange Square, CTS No. 255, Suren Road, Andheri East, Mumbai - 400093, India.

Tel. No. 91-22-67318888 [email protected] www.mcxindia.comMCXI n d ia 's N o .1 C o m m o d it y E x c h an g e

Disclaimer: The informat ion provided here is not guaranteed for i ts accuracy or completeness. It is solely meant for information disseminat ion and knowledge sharing.Neither Multi Commodity Exchange of India Ltd. (MCX) nor its employees accepts any liability, whatsoever, for any trading decision and loss incurred or arisingfrom the use of this publ icat ion. MCX or any of i ts aff il iates makes no warranties as to the accuracy of informat ion or results to be obtained from its use.