The Hindu Business Line : Change in NY delivery mechanism

THE New York Board of Trade's decision to change the delivery specifications for futures cotton contract that plans to apply from next year the `age-of-bale penalty' to old cottons delivered in a calendar year may bear little relevance to Indian market situation.

These would not have any impact on actual importers and users of imported cotton in the country, as they would have specified in the contracts on the seasonality of the cotton to be procured, cotton traders here say.

The NYBOT amendments to delivery specifications may be `academic' for actual cotton users in so far as the `age-of-bale' discount/penalty for two reasons — that more than 95 per cent of futures cotton trading end in squaring-up or settlement of deals with hardly any physical delivery of cotton. The end-users specify at the time of contracting which year cotton they want and accordingly stipulate either the premium or discount of price, cotton procuring and indenting agents here told Business Line.

Most Indian consumers of imported cotton and their broking firms say that looking from the above factors, NYBOT's delivery specification changes are `cosmetic' in nature. However, a section of the trade that has been importing cotton fears the introduction of `age-of-bale' discount or the penalty on cotton delivered might trigger dumping of whatever the left over quantity old cotton on Indian consumers. The fear is born out of fact that the US cotton trade would have to knock old cotton out of the board's trading system before March 2003. This is because that the new `age-penalty' will be applied to all cotton deliveries beginning with the May 2003 delivery.

NYBOT, the holding company for the New York Cotton Exchange, has brought about changes in the delivery specifications for its futures contract beginning with the May 2003 contract involving quality standards for certifying cottons. The `age-of-bale' discount or penalty will apply to all cotton delivered in a calendar year that is two or more years later than the cotton's year of growth. This is defined as the marketing season during which the cotton was grown.

The `age-of-bale' penalty on cotton mooted last year by the NYBOT and adopted this October with a set of procedure for implementation runs like this: cotton delivered in the second calendar year after its year of growth shall carry a two-cent per pound penalty. An additional two cents per pound penalty will apply for each additional calendar year after the second. For example, cotton grown in the 2002-03 market year would accrue a two cent per pound penalty beginning on January 1, 2004, a four-cent per pound penalty beginning on January 1, 2005 and a six cent per pound penalty beginning on January 1, 2006 etc.

Besides the `age-of-bale' penalty, the NYBOT has also brought out changes that set narrowing the premium micronaire range (of 4.8 to 4.9) and specifying the minimum fibre strength required for cotton to be certificated which goes up from the present 22 gpt (gram per tex) to 25 gpt.

But the Indian importers view point is that since most Indian imports are based on specific deliveries and not through futures, the issue of age-penalty' for futures delivery will be of no consequence. Import cotton contract by Indian consumers would normally refer to the new crop and if the old cotton is passed of as new crop, then it would be altogether a different issue, the traders say

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