Performance Review of Commodity

KAPAS

1. Background a. Brief about the commodity such as sample picture, lifecycle and various varieties/grade of the commodity found in India

Kapas refers to the unginned fibrous substance extracted from the cotton plant (cotton boll), which covers the underlying seed. It is the primary product obtained from a cotton plant. It is picked in the form of bolls. The picking can be manual or mechanized. The picked cotton bolls which we call as Kapas is also known as Seed Cotton or Raw Cotton. A boll of Kapas contains lint (fibrous part) and cotton seed. Typically, raw cotton contains 34-35% Fiber and 63.5% seed by weight. Raw cotton is measured and stored in units of maunds (20 kg) bag each. There is no direct use of Kapas or seed cotton. Kapas is ginned to produce lint (fibre) and cotton seed. Fiber is used for manufacturing of yarn, which is used for manufacturing of textiles. Cotton seed is further crushed to obtain cotton seed oilcake and cotton seed oil. Cotton seed oil cake is used as a cattle feed and cotton seed oil is used for human consumption.

Kapas is majorly grown as summer or Kharif season crop in India. In irrigated areas of northern states like Punjab and Haryana, sowings take place during mid-April or May, while in central and southern regions, generally, sowings take place around June-July depending on onset of monsoon and continues till August. Harvesting generally starts from October onwards and continues till February.

Crop Cycle (India) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Northern States Other Regions Sowing Harvesting

Life Cycle: Value Chain of the Commodity Major Varieties /Grade Major Varieties*

Bengal Desi, Assam Comilla, V797/G-Cot-13, J-34 Hybrid, LRA 5166, H-4/H6/MECH, Sanker-6/10, Bunny / Brahma, MCU-5 /Surabhi, DCH-32

(*Varieties differ as per the Staple Length)

NCDEX : Important Quality Parameters

Staple Length Basis 29 mm Tenderable Range 29 mm and above Outturn Minimum 34% Trash content Max 3% Micronaire Basis: 3.8-4.0 Micronaire Strength Basis: Minimum 29 GTex Reflectance Deliverable Range: 75-81

Yellowness Deliverable Range: 7.5-9.5 Moisture Max. 8%

b. Commodity fundamentals and balance sheet as per the following format (to be prepared based on publicly available information on best effort basis):

Table - Fundamentals & Balance sheet (quantity) (Lakh bales of 170 Kg each) Global Scenario Previous FY (2018-19) Current FY (2019-20) (P) Opening Stocks* 1,034.04 1,028.20 Production* 1,519.01 1,558.78 Imports* 543.96 520.98 Total Supply* 3,097.01 3,107.95 Exports* 526.61 520.48 Domestic Consumption* 1,542.20 1,418.64 Ending Stocks* 1,028.20 1,168.83 Source: USDA (April 2020); P= Provisional Previous FY is 2018-19 and Current FY is 2019-20 *Data for Kapas is not available in the public domain; hence Cotton data has been provided. Cotton (Lint) recovery is 34% of the Kapas/ Raw Cotton.

(Lakh bales of 170 Kg each) Indian Scenario Previous FY (2018-19) Current FY (2019-20) (P) Opening Stocks 118.15 119.29 Production 330.43 377.82 Imports 23.05 25.61 Total Supply 471.63 522.72 Exports 44.97 42.26 Domestic Consumption 307.38 281.76 Ending Stocks 119.29 198.69 Source: USDA (April 2020); P= Provisional; Previous FY is 2018-19 and Current FY is 2019-20 Data for Kapas is not available in the public domain; hence Cotton data has been provided. Cotton (Lint) recovery is 34% of the Kapas/ Raw Cotton. Kapas is not exported directly, instead it is ginned and the produced lint is exported or imported in the form of pressed bales. Kapas is consumed by ginning units for the production of lint and cotton seed. Almost total production is ginned domestically.

(Lakh bales of 170 Kg each) Top 10 Major Producing Countries Top 10 Major Consuming Countries Rank Country Previous FY Current FY Country Previous FY Current FY 1 India 330.43 377.82 China 505.89 448.26 2 China 355.40 349.00 India 307.38 281.76 3 United States 235.23 253.58 Pakistan 137.36 129.67 4 Brazil 166.49 169.06 Bangladesh 94.90 88.50 5 Pakistan 97.34 84.53 Turkey 88.37 87.09 6 Uzbekistan 41.94 44.83 Vietnam 89.65 80.69 7 Turkey 47.39 43.54 Brazil 43.54 42.26 8 Greece 18.06 21.45 Uzbekistan 35.86 40.34 9 Mexico 22.22 20.11 United States 37.87 37.85 10 Benin 17.93 18.57 Indonesia 40.34 35.86 Others 186.58 176.29 Others 161.04 146.36 World Total 1,519.01 1,558.78 World Total 1542.205 1418.64 Source: USDA, Previous FY is 2018-19 and Current FY is 2019-20

Countries are arranged in descending order based on the figure in Current FY Data for Kapas is not available in the public domain; hence Cotton data has been provided. Cotton (Lint) recovery is 34% of the Kapas/ Raw Cotton.

(Lakh bales of 170 Kg each) Top 10 Major Exporting Countries Top 10 Major Importing Countries Rank Country Previous FY Current FY Country Previous FY Current FY 1 United States 189.07 192.11 China 123.46 96.05 2 Brazil 77.07 110.14 Bangladesh 92.21 88.37 3 India 44.97 42.26 Vietnam 88.37 81.97 4 Greece 17.35 18.57 Turkey 44.81 51.23 5 Benin 16.65 16.33 Pakistan 36.50 47.39 6 Australia 46.52 15.37 Indonesia 39.08 37.14 7 Mali 17.29 15.37 India 23.05 25.61 8 Cote d'Ivoire 11.46 11.85 Malaysia 9.53 16.01 9 Burkina 10.25 10.89 Thailand 13.77 11.21 10 Cameroon 7.36 7.04 Mexico 10.89 8.97 Others 88.61 80.55 Others 62.29 57.03 World Total 526.61 520.48 World Total 543.96 520.98 Source: USDA, Previous FY is 2018-19 and Current Year is 2019-20 Countries are arranged in descending order based on the figure in Current FY Data for Kapas is not available in the public domain; hence Cotton data has been provided. Cotton (Lint) recovery is 34% of the Kapas/ Raw Cotton.

(Lakh bales of 170 Kg each) Top 10 Major Producing States in India Rank States Previous FY Current FY 1 Gujarat 88.00 96.00 2 Maharashtra 70.00 85.00 3 Telangana 35.20 51.00 4 Haryana 23.00 25.00 5 Karnataka 15.50 20.50 6 Madhya Pradesh 22.63 16.00 7 Andhra Pradesh 11.85 15.00 8 Lower Rajasthan 14.65 13.50 9 Upper Rajasthan 13.35 12.50 10 Punjab 8.50 10.00 Others 9.32 10.00 Total 312.00 354.50 Source: Cotton Association of India (April 2020), Previous FY is 2018-19 and Current Year is 2019-20 States are arranged in descending order based on the figure in Current FY c. Major changes in the polices governing trade in the spot markets of the commodity (FY 2019-20)

Date Major Policies governing trade and Changes Increase in Minimum support price (MSP) of Kapas for the 2019-2. Details has been as given below: MSP of Cotton (Rs. / Qtl.) 3-Jul-19 Commodity 2018-19 2019-20 Y-o-Y Change Medium Staple Cotton 5150 5255 2.0% Long Staple Cotton 5450 5550 1.8%

The Govt. exempted mandis, procurement agencies, farm operations, agri machinery hiring 27-Mar-20 centres as well as intra- and inter-state movement of farm implements from the lockdown rules. 25-Mar-20 Cotton Corporation of India has halted procurement of Cottton/Kapas d. Geo political issues in the commodity and its impact on Indian scenario (FY 2019-20)

Date Event Key Details Key Implications/Impact World Trade with China set to China declared Outbreak of Corona virus that diminish. Trade disruptions an emergency 20-Jan-20 was first reported from Wuhan, resulted into reduced demand about corona China, on 31 December 2019. affecting export growth and overall virus attack. business prospects. WHO declared COVID 19 as a 11-Mar-20 COVID-19 Economic Slow Down pandemic Indian PM urged countrymen to Physical Market activities started 19-Mar-20 observe Janta Curfew on 22nd Lockdown in getting adversely impacted due to and March. It is followed by nation- Indian States movement restrictions and thereafter wide lock-down for 21 days closures of physical markets. effective from Mar 25.

2. Trading related parameter a. Monthly and Annual traded volume (quantity in appropriate units)

Annual Traded Volume Month year Symbol Traded volume (MT) (MT) Apr 2019 KAPAS 43,229 3,13,314 May 2019 KAPAS 14,086 Jun 2019 KAPAS 13,440 Jul 2019 KAPAS 18,359 Aug 2019 KAPAS 20,757 Sep 2019 KAPAS 21,857 Oct 2019 KAPAS 21,802 Nov 2019 KAPAS 25,939 Dec 2019 KAPAS 30,943 Jan 2020 KAPAS 40,084 Feb 2020 KAPAS 32,301 Mar 2020 KAPAS 30,517 b. Annual traded volume as proportion of total deliverable supply (quantity in appropriate units)

Symbol Traded volume (MT) Deliverable supply( MT) Proportion KAPAS 3,13,314 180,50,000 1.74% c. Annual traded volume as proportion of total annual production (quantity in appropriate units)

Symbol Traded volume (MT) Production( MT) Proportion KAPAS 3,13,314 180,50,000 1.74%

d. Annual average Open interest as proportion of total production Symbol Average Open Interest (MT) Production( MT) Proportion KAPAS 3,309 180,50,000 0.02% e. Annual average Open interest as proportion of total deliverable supply Symbol Average Open Interest (MT) Deliverable supply( MT) Proportion KAPAS 3,309 180,50,000 0.02% f. Monthly and Annual value of trade (in Rs. Crores) Month Years Symbol Traded Value (in Cr.) Annual value (In Cr.) Apr 2019 KAPAS 1,044 6,893 May 2019 KAPAS 326 Jun 2019 KAPAS 303 Jul 2019 KAPAS 413 Aug 2019 KAPAS 450 Sep 2019 KAPAS 467 Oct 2019 KAPAS 470 Nov 2019 KAPAS 559 Dec 2019 KAPAS 684 Jan 2020 KAPAS 895 Feb 2020 KAPAS 673 Mar 2020 KAPAS 608 g. Monthly and Annual quantity of delivery (in appropriate units) No delivery happen in FY 208-19. h. Monthly and Annual value of delivery (in Rs. Crores) No delivery happen in FY 208-19. i. Monthly and Annual Average Open Interest (OI) (in appropriate units)

Average Open Interest Annual Average Open Month Years Symbol (MT) Interest (MT) Apr 2019 KAPAS 6,819 3,309 May 2019 KAPAS 1,380 Jun 2019 KAPAS 2,480 Jul 2019 KAPAS 2,227 Aug 2019 KAPAS 2,539 Sep 2019 KAPAS 3,222 Oct 2019 KAPAS 3,497 Nov 2019 KAPAS 3,706 Dec 2019 KAPAS 4,037 Jan 2020 KAPAS 4,217 Feb 2020 KAPAS 3,284 Mar 2020 KAPAS 2,646

j. Annual average volume to open interest ratio Average of traded volume Average of Open Interest Symbol (MT) (MT) Traded to Open interest KAPAS 1,268 3,309 38.33% k. Total number of unique members and clients who have traded during the financial year Symbol Member Count Client Count KAPAS 174 2,371 l. Ratio of open interest by FPOs/farmers/Hedge/VCP positions to total open interest (Annual average as well as maximum daily value)

Annual average of ratio of open interest by FPOs/farmers/Hedge/VCP positions to total open interest

Symbol VCPs/ Hedger Proprietary traders Others KAPAS 0.01% 23.96% 76.03%

Maximum daily value of ratio of open interest by FPOs/farmers/Hedge/VCP positions to total open interest

Symbol VCPs/ Hedger Proprietary traders Others KAPAS 10.34% 89.66% *It is calculated on the day when commodity has highest open interest during the year. *Commodity wise client categorization is as per category details as provided by the members. m. Number of unique FPOs / farmers and VCPs/hedgers who traded in the financial year

Commodity Count KAPAS 1 *Commodity wise client categorization is as per category details as provided by the members. n. Algorithmic trading as percentage of total trading

Commodity % KAPAS 0.38%

o. Delivery defaults

No delivery happen Kapas contract in FY 2028-19

3. Price Movements a. Comparison, correlation and ratio of standard deviation of Exchange futures price vis-à-vis international futures price (wherever relevant comparable are available).

Kapas not traded on any international Exchange. b. Comparison, correlation and ratio of standard deviation of Exchange futures price vis-à-vis international spot price (wherever relevant comparable are available) and domestic spot price (exchange polled price).

Kapas not traded on any international Exchange.

c. Correlation between exchange futures & domestic spot prices along with ratio of standard deviation.

Correlation Spot Futures Spot 1 Futures 0.227905 1

Standard Deviation Spot Futures Spot 1 0.962352 Futures 1.039121 1

d. Correlation between international futures & international spot prices along with ratio of standard deviation (wherever relevant comparable are available).

Kapas not traded on any international Exchange e. Comparison of Exchange polled price and mandi price (in case of agricultural commodities) / other relevant price (in case non-agricultural commodities) at basis Centre.

1,400.00 7000 1,200.00 6000 1,000.00 5000 800.00 4000 600.00 3000

400.00 2000 Mandi Mandi Prices 200.00 1000

0.00 0 Futures and Spot Prices

Futures Spot Mandi

Source: Agmarket f. Maximum & Minimum value of daily futures price volatility and spot price volatility along with disclosure of methodology adopted for computing the volatility.

Futures Month Value Maximum Mar 0.01686286 Minimum August 0.004420568

Spot Month Value Maximum Nov 0.015698 Minimum Jun 0.003257

Value of daily futures price volatility (April 2019- March 2020)

g. Number of times the futures contract was in backwardation/ contango by more than 4% for the near month contract in the period under review

Number of times Contango 40 Backwardation 67

4. Others parameters a. Qualitative and quantitative measure for Hedge effectiveness ratio (Methodology in Annexure I) and basis Risk (Volatility of Basis) along with disclosure of methodology adopted for such calculations. (Volatility calculated by Square root of Standard Deviation of daily returns for the period from 1 April 2019 to 31 March 2020)

Basis Volatility 12.67889

KAPAS Period Hedge Ratios Hedge Efficiency (in percentage) Week 1-4 0.61 -69.52 Week 5-8 0.72 -55.25 Week 9-12 0.62 0 Week 13-16 0.62 0 Week 17-20 0.69 0 Week 21-24 0.53 0 Week 25-28 0.78 0 Week 29-32 0.68 54.66 Week 33-36 0.65 60.3 Week 37-40 0.73 18.91 Week 41-44 0.83 -546.71 Week 45-48 0.67 87.25

b. Details about major physical markets of the commodity vis-à-vis market reach in terms of availability of delivery centers (information to be provided state-wise and UT-wise).

State Major Trading Centre Exchange Delivery Centre Gujarat Kadi ADC Rajkot Basis Centre Surendranagar Viramgam Vijapur Halvad Dhrangadhra Wakaner Tankara Morbi Taragadhi Padadhari Shapar NA

Hadamtala Gondal Jasdan Amreli Bhavnagar Botad Himmatnagar

Telegana / Andhra Pradesh Hyderabad Adilabad Warrangal NA Maharashtra Aurangabad Akola Yavatmal Jalgaon Beed Parbhani Nanded Jalna Amravati Murtizapur Akot Khamgaon Hinganghat Dhule NA Madhya Pradesh Indore Khargone NA Punjab and Hariyana Abohar Malaout Bathinda Ludhiana Hisar Sirsa NA Rajasthan Sri Ganganagar Bhilwara Hanumangarh Suratgarh Jaipur NA Tamilnadu Erode Salem NA Karnataka Bijapur Dharwad Haveri NA

c. Details about major physical markets of the commodity and average Open Interest for each month generated from those regions.

Note – The OI for each month is classified based on the Member level. The Average OI is on gross level (Long OI + Short OI)

ANDHRA HARYAN MADHYA PUNJA Month PRADES GUJARAT KARNATAKA MAHARASHTRA RAJASTHAN A PRADESH B H 19-Apr 63 2,053 95 1 646 7,747 687 504 19-May 51 470 17 - 98 1,382 253 200 19-Jun 56 791 32 - 93 2,565 566 354 19-Jul 85 689 24 - 134 2,139 528 548 19-Aug 120 746 31 - 200 2,289 769 572 19-Sep 122 1,037 39 - 245 2,746 835 1,092 19-Oct 90 1,040 69 - 517 2,842 764 1,264 19-Nov 70 1,037 54 - 200 2,271 857 2,117 19-Dec 56 1,224 50 - 120 2,375 618 2,714 20-Jan 35 1,089 34 - 284 3,179 751 2,504 20-Feb 22 1,357 8 - 187 3,274 598 671 20-Mar 6 956 9 - 207 3,087 631 170

d. Details, such as number and target audience, of stakeholders’ awareness programs carried out by the exchange.

Following list of Awareness programme, Stakeholder engagement programme has conducted for FY 2019- 20.

Sr. Programme Location Number of Number Participants 1 Commodity Ki Paathshala Rajkot 45 2 Investors Education Programme Ahmedabad 46 3 Stakeholder Engagement Ahmedabad 27 Programme – NERL, NCCL and NCDEX 4 Stakeholder Engagement Kadi 36 Programme – NERL, NCCL and NCDEX 5 Investors Education Programme Ahmedabad 42

e. Steps taken / to be undertaken to improve hedging effectiveness of the contracts as well as to improve the performance of illiquid contracts.

 Creating an awareness about the Hedge policy to bona fide hedger  Awareness Programme in Major trading Centre’s as well as remote location to increase hedging participation from the value chain participants.  One to one meetings with market participants create awareness about new development / new initiatives at exchange level.

ANNEXURE I

Qualitative and quantitative measure for Hedge effectiveness ratio

Methodology

푉푎푟 (ℎ푒푑푔푒푑 푝표푟푡푓표푙𝑖표) 퐻푒푑푔푒 퐸푓푓𝑖푐𝑖푒푛푐푦 = 1 − 푉푎푟 (푢푛ℎ푒푑푔푒푑 푝표푟푡푓표푙𝑖표)

Unhedged portfolio is portfolio comprising of spot commodity, and hedged portfolio is a portfolio comprising of spot commodity and short futures.

If there is no variance reduction, i.e.

푉푎푟 (ℎ푒푑푔푒푑 푝표푟푡푓표푙𝑖표) = 푉푎푟 (푢푛ℎ푒푑푔푒푑 푝표푟푡푓표푙𝑖표)

Then, 퐻푒푑푔푒 퐸푓푓𝑖푐𝑖푒푛푐푦 = 1 − 1 = 0

If spot is completely hedged using futures, then

푉푎푟 (ℎ푒푑푔푒푑 푝표푟푡푓표푙𝑖표) = 0

퐻푒푑푔푒 퐸푓푓𝑖푐𝑖푒푛푐푦 = 1

Position is spot commodity and in futures is not initiated at 1:1. The fraction of position size in futures contract to the position size in spot commodity is called ‘Hedge Ratio’.

So, in this analysis, we are calculating: 푉푎푟 (푠푝표푡 푟푒푡푢푟푛 − ℎ푒푑푔푒 푟푎푡𝑖표 ∗ 푓푢푡푢푟푒푠 푟푒푡푢푟푛) 퐻푒푑푔푒 퐸푓푓𝑖푐𝑖푒푛푐푦 = 1 − 푉푎푟 (푠푝표푡 푟푒푡푢푟푛)

Weekly returns are used for the analysis. The hedge ratio is calculated based on previous 30 weeks’ data. For example, for week 1 to week 4 of FY19-20, we use last 30 weeks’ data of FY18-19 to compute hedge ratio which had highest hedge efficiency in those 30 weeks. This hedge ratio is then used to compute hedge efficiency for Week 1 – Week 4 of FY 19-20. So, hedge ratio is derived from 30-week rolling basis.

Negative hedge efficiency imply variance has increased by taking position in futures contract. Some of this can be attributed to the fact that spot price is not precisely available at the time of futures closing. So, the timing of generation of these 2 data is different.