Cotton hedging is need of the time

Bangladesh should practise hedging for cotton imports, as the consumption of the fibre is on the rise and so are the trading risks, said industry insiders.

Hedging is a strategy designed to reduce the risks of adverse price movements in an asset. A hedge usually takes the form of a transaction in one market or asset in order to offset possible losses in another.

For example, a company might buy a foreign exchange option to protect itself against the risk of fluctuations in spot currency rates; or, an importer or processor of a commodity may sell futures contracts to offset losses if prices fall.

“Hedging is a good option for us as our volume of cotton import is on the rise as a result of higher demand from garment makers,” said Jahangir Alamin, the immediate past president of Bangladesh Textile Mills Association.

If adopted, it will help save at least a few million dollars, he added.

Currently, Bangladesh imports approximately $2 billion worth of cotton a year, according to the BTMA.

In case of hedging, importers need to pay a certain amount of money in advance to the exporters, which is not permitted under existing foreign exchange rules. The BTMA tried, several times, to ease the central bank's rules for hedging but in vain, due to some technicalities, Alamin added. In recent times, cotton prices in the international markets declined significantly due to non-stockpiling of the fibre by China, the largest cotton-consuming country in the world. In fact, it is at its five-year low of 60-65 cents per pound at present.

Hedging will also ensure guaranteed supply of cotton at a reasonable price even in times of crisis as the purchase agreements are signed way before the shipments.

Since Bangladesh is not a cotton producing country, it should always think about regular and adequate supply of the fibre for the best interests of of the garment sector, Alamin said.

If there is any disruption in the supply chain of cotton, the whole garment sector, which is considered the lifeline of the economy, will be in trouble, said Alamgir Morshed, head of financial markets of Standard Chartered Bangladesh.

HSBC and SCB were the first banks to introduce commodity hedging in the country. The option will also help during the current phase of currency volatility, he said. Major currencies like euro and dollar are fluctuating against the local currency, at present..

Another reason to pursue hedging is that the prices of garment items are related to cotton prices, the Morshed said.

He went on to cite the case in 2010 when cotton prices reached its peak of $2.5 per pound. Bangladeshi importers had to source the fibre at the price but the prices of garment items did not increase.

Given this bitter experience, the government has been trying to sign agreements with India and Uzbekistan for guaranteed supply of cotton. But the agreements are yet to be signed due to difficult conditions laid out by the supplying countries.

Furthermore, after the price volatility of cotton in 2010 and 2011, many Bangladeshi importers ended up on the default list of International Cotton Association, a Liverpool-based organisation that makes the laws and bylaws of global cotton trade, for delayed payment or for deferred payment.

“Hedging could have been solved all these problems,” Alamgir added. In fiscal 2004-05, the country imported three million bales of cotton [480 pounds make a bale], but within a span of ten years the country's consumption doubled, according to BTMA.

Cotton import registered 8 percent growth to 5.6 million bales in fiscal 2013-14 and 6 percent the previous year. 

Currently, the local spinners and weavers have the capacity to consume 10 million bales of cotton, but they are unable to go into full production due to inadequate supply of gas and power to industrial units.