The government has decided to allow KCA to start hedge trading in cotton business. The federal cabinet, in its meeting on March 24, 2005, gave the control of cotton hedge trading to the Ministry of Commerce. KCA is enthusiastically working on the issue and according to reports all is set to start hedge trading with the commencement of the forthcoming cotton season. It is said that the government took the decision after having debates with all the stakeholders.
On the other hand, the Pakistan Cotton Ginners Association (PCGA) and Farmers Association of Pakistan (FAP) are strongly opposing the restoration of hedge trading in the country and they are planning to move the case in Sharia Court against it.
The question is, does our country need or can afford to have hedge trading in the cotton business? There are two aspects which need to be viewed regarding cotton hedge trading. One is that KCA is campaigning to portray a rosy picture of the side.
It claims that it is going to be beneficial to all stakeholders. Every loophole has been plugged in the revised bye-laws leaving no chance of foul play and the higher securities will ensure the presence of genuine buyers and sellers in the ring and provide cover to them. The hedge trading will also help stabilise the market reducing speculative factor, according to their viewpoint.
Unfortunately the other aspect does not appear to be very attractive to any of the stakeholders.
As a matter of fact, the role of hedge trading as a marketing channel is not so significant as is depicted by a specific sector. But it acts as a casino where the players are interested in the exchange of profit and loss rather than to take physical delivery of cotton. The ratio of genuine business that (physical delivery) is much lower than the size of the business takes place in a month. The delivery of a few thousand is witnessed as against the business of lakhs of bales. (The record of previous period of hedge trading is available with the KCA).
Although cotton hedge trading is said to be optional yet it has overwhelming effect on the whole trade of cotton in the country. The worst part of hedge trading is that it does not remain optional. No matter if the game remains within the ring, unfortunately the whole trade has to move with the happenings in the ring.
In fact the hedge market plays a driver's role. Therefore, the main players may drive the business in their favour squeezing a number of stakeholders. Pakistan has experienced hedge trading till 1975. There are so many sufferers of that time remembering those days as a nightmare.
The USA is the only country successfully operating hedge trading. The other markets are almost inactive. USA consumes about 1/5 of its cotton production whereas the rest of it is exported.
Therefore, the players in NYFM influence the global cotton trade and try to drive the market according to their plans. The traders, who claim that hedging helps stabilise cotton prices, must not forget the cotton season 2003-04. We have been influenced by the New York future market.
The buyer and the seller have been watching the outcome of the NYFM before making any deal. Consequently, the cotton market, in Pakistan, observed a sharp rise and fall in prices, leaving disastrous effects on the stakeholders. Many of them could not get to their feet as yet.
China also suffered by the fluctuations of prices in NYFM. Under the influence of hedge marketing, the prices fluctuate more frequently paving the way for weak buyers and sellers to dishonour their deals in the open market. When we are so much influenced by NYFM how a common cotton trader can be indifferent to our domestic hedge market.
A common buyer and seller will be on the horns of a dilemma while finalising his deal under the influence of two hedge markets simultaneously viz. USA and Pakistan.
The spinning capacity of Pakistan has been expanding appreciably since the last few years and so is our cotton production. However, the consumption of cotton is going to cross the production level. Our textile industry has come up as a cotton buyer capable of consuming the entire cotton production. Besides, the exporters are there as a second buyer and the government itself as the TCP is there as a third buyer to safeguard the growers' interest.
During the last season, the government indeed, managed well to deal with the cotton crises successfully buying a large quantity of bales through the TCP, proving that the government holds the driving seat of the largest business of the country. Allowing restoration of hedge trading means shifting the driving force to a small section of the traders who may not be among the main stakeholders.
Above all none of the main stakeholders ie growers, ginners and spinners, never raised their voice in favour of hedge trading. Contrary to that they are opposing it firmly. If it was so beneficial for them, they would be among the front-liners to favour it. Simple as that.
As a matter of fact, there is a small group of KCA members/speculators and brokers, who have been struggling for restoration of cotton hedge trading for their vested interest. They are going to be the main beneficiary of the show and behind them will be international cotton merchants as well as local players.
In a nutshell, the cotton hedge market is not a necessity of growers, ginners and spinners rather it is a dream of the players.
Particularly the decision of restoration of hedge trading may prove a deadly step for the growers. Therefore, the government must think twice about its pros and cons before taking any step to allow cotton hedge trading in the country otherwise things will not be different from what happened in our stock exchange markets.