InvestorQ : Why is it important to hedge cotton prices and how is it done?
Neha Samdani made post

Why is it important to hedge cotton prices and how is it done?

Arusha Ray answered.
3 years ago

Cotton has a history of volatile and stable pricing over time. The pricing of cotton is determined by cropping patterns, the output and the demand factors. The price of cotton rallied sharply in the middle of 2016 but since January 2017, the price of cotton has been fairly stable at around the current levels. Of course, cotton being seasonal, there are seasonal variations in supply which impacts the price. It is this seasonal patterns and weather dependence that makes cotton an ideal agri commodity for hedging and risk management purposes.

In fact, the cotton life cycle is impacted by weather conditions, pest attacks, diseases and other risk factors. Additionally, shifts in government policy on import and export of cotton also have an impact on cotton demand and supply leading to price disruptions. As a result, all the players in the cotton value chain including the grower, processor, marketer, the exporter and the end user need to manage their price risk. It is also critical for the textile industry as most of the users of cotton are in the SME sector and price disruptions can become a solvency issue for them. Hence hedging through futures acquires additional importance in case of cotton.