Huge gains in gold and a crash in cotton prices have left domestic traders in a fix.

Between last November and this July, around 2.14 lakh bales of cotton were deposited in warehouses in Maharashtra and Gujarat accredited by the Multi Commodity Exchange (MCX). Of this, more than 1 lakh bales are still lying around as those holding them are reluctant to take delivery, mainly due to a price crash and scare over the quality of the stock, cotton traders told BusinessLine .

Quality concerns

While taking delivery of cotton from warehouses is time consuming, a big trader holding a large stock has raised some quality issues with the MCX over some of the bales he had tested, sources said.

The cotton trader is yet to test the quality of the entire quantity he holds. One bale is equal to 170 kg.

Lengthy procedure

The regulations are such that he may have to take delivery of the stock first before seeking to return it, and the stock return procedure is lengthy. A higher moisture content than specified in the trading contracts in the cotton stock lying in warehouses due to rain is also a concern. And, trading for fresh cotton stocks will start only from October or November.

There was some panic last month as the spot prices, at ₹20,500 a bale on the MCX, were higher than the futures price, at ₹19,500. The prices had crashed from more than ₹23,000 in April to around ₹19,000 in July.

A regulatory official recalled that the FMC, the erstwhile commodity market regulator, had followed a practice of checking the quality of cotton stocks lying in warehouses when spot prices zoomed past future rates, as it was an indication that even though cotton was in the warehouses, delivery was short due to poor quality stock.

Liquid contract

Futures contracts on the MCX are among the most liquid agri contracts with 100 per cent market share.

MCX prices have become the benchmark for the cotton industry in India, with corporates such as Louis Dreyfus, Manjeet Cotton, Arvind Ltd, Gill & Company and SportKing hedging on the exchange.

Gold trouble

Meanwhile, gold prices rose to over ₹38,000 per 10 gram. This has resulted in record delivery of contracts traded on the MCX. But the exchange had to hike its insurance cover for gold overnight to manage the delivery. MMTC-PAMP, a bullion refinery that tried to deliver the contracts, faced hurdles as one of the bullion vaults first sought adequate cover.

It was feared that traders seeking delivery of gold may not have adequate capital as it was for the first time that such a huge amount of the metal was marked for delivery. The MCX witnessed record delivery of 5,158.8 kg (valued at ₹1,821 crore) in August delivery contracts.

BusinessLine had sought MCX’s response to two issues with regard to the recent chaos in delivery on its platform. The first was on a complaint raised by traders over the quality of cotton stock in a Gujarat warehouse. The second was on the difficulties faced by MMTC in physical delivery of gold in July due to lower insurance cover.

MCX response

In response, MCX said: “Both issues are operational in nature and have been addressed within the framework of the company’s by-laws and regulations.”

Responding on behalf of MCX Clearing Corporation, a spokesperson said: “MCXCCL has put in place a mechanism for redress of any quality complaints for all commodities. At present there are no outstanding complaints. We have not come across cases where buyers are reluctant to take delivery due to quality issues.”

SEBI did not reply to an email query on the market scare on the quality of cotton stock.

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