In order to eliminate market uncertainty and to cover the risk of fluctuation in the price of cotton, Ministry of Textile is all set to restart cotton hedging.
According to the sources, the work on hedge market restoration was started after its approval in the new textile policy 2014-19. The new hedging would be established under Security Exchange Commission of Pakistan and in order to take all stakeholders on board, Ministry of Textile would soon call a meeting, in which representatives of Karachi Cotton Association (KCA), ginners association and growers would be taken into confidence and their proposals or objections would be noted.
The KCA has past experience in operation of hedge market, infrastructure facilities, well updated bye-laws, which make its case very strong for restoration of hedge market under its control, an official said, however, we are open, and the final decision of running the hedge would be taken after consultation with all stakeholders, he added. According to KCA officials, the association has a comprehensive infrastructure and adequate by-laws for hedge trading in cotton. There are 320 licensed cotton brokers to facilitate trading of cotton among the ginners, spinners & exporters, including a Clearing House, Survey Room, Sample Room, Trading Hall, Fiber Testing Laboratory equipped with High Volume Instrument (HVI) Spectrum. The KCA has many times requested permission to restart hedge trading, stating, it has been performing hedge trading in cotton since 1934. Following the nationalization of export trade and establishment of Cotton Export Corporation of Pakistan in the public sector, the Hedge Trading in cotton was suspended by an administrative order in 1976. Officials are very optimistic that after the start of cotton hedging market would become stable and farmers and ginners would be saved from abrupt and huge losses.
Cotton hedging would completely eliminate cartels and monopolies in cotton market, which suddenly throw down or lift market, causing huge losses to farmers and others in supply chain, an official said. In the new trading system, any one person, group of persons, or firm can trade futures contracts. Generally futures market participants fall into two categories. These categories are hedgers and speculators. To put it in simple words, in cotton hedging, one buyer ask the traders at the market to deliver cotton bales or thread at any future date, the trader, while considering crop size, demand, and present value, ask his supplier (it could be anyone in supply chain, from grower to ginner) the price of cotton at that given date, according to that information he give the prices of cotton for asked future date. It is not the first time that government wants to start the market; many times the matter surfaced but was dropped due to many factors, during last two decades.
There are mafias who would suffer, if uncertainty from the market is eliminated; they would not be able to make money by creating artificial demand and supply differences, official said. The high-ups of the KCA, being the chief exponents of hedge trading, even before independence, have all along been protesting against the Securities and Exchange Commission of Pakistan (SECP) to allow it to start forward trading in commodities including cotton, gold and some other primary commodities as it is its inherent right.
The KCA bosses have been trying to restore hedge trading in cotton also, but their requests have since been turned down on various counts. The main hindrance in revival of hedging was rumours that it is not Islamic, this idea alone was enough to discourage previous governments.
Hedging is not at all un-Islamic. Recently, we have a ruling from Islamic Ideology Council, that cotton hedging does not fall under betting, and is allowed, official claimed. Utility benefits and advantages of hedge trading in cotton has been affirmed and re-affirmed by the three official Hedge Contract Enquiry, committees set by government in 1953, 1965, and 1971. What we are trying to do is to ensure that no one could take advantage and all stakeholders get due representation, when the actual trade is started, official said, adding, in order to achieve precision, we are following the most modern model of New York hedge market.