Cotton & Mentha Oil

Barring agricultural commodities and natural gas, we’ve managed to cover almost all of the major commodities in the previous chapters of this module. In this one, we’ll be focusing purely on the trading of two agricultural commodities - cotton and mentha oil trading.

While these aren’t the only ones available for trade, we’ll restrict our focus to just these two since cotton and mentha oil trading seems to be the only area of agri commodity trading that offers some levels of liquidity. The other commodities like kapas, black pepper, castor seed, crude palm oil, and rubber, among others either have too little liquidity or are completely illiquid.

Illiquid commodity trading can be extremely dangerous since all of them, barring crude oil, have a compulsory delivery mechanism. If you’re not able to square off your position on time due to lack of liquidity or any other reason, you would either have to take delivery of the commodity or pay a huge penalty for breach of contract. This is precisely why it is very important to trade only in commodities that offer high liquidity.

Okay, so now that you’ve been apprised of the agricultural commodity scene, let’s get down to business and check out the details of cotton and mentha oil trading. We’ll first take up cotton and then move onto mentha oil.

Cotton: An overview

Cotton is arguably the only commodity that has been in constant use since prehistoric times. In a recent excavation carried out in Mexico and the Indus Valley Civilization, archeologists discovered cotton fabric that dates back to 5,000 BC! Cotton then slowly made its way across to the rest of India somewhere between 2,000 BC to 1,000 BC.

The primary reason for cultivating cotton is for the fibre that it produces. This fiber is then spun into yarns and is used to make cotton fabric. Cotton fabric alone accounts for more than 35% of the entire world’s textile fibre, making it the single most important textile fibre.

Cotton is not only absorbent, but is also very skin friendly, making it the perfect option for sunny and tropical climates like we experience in India. The other parts of the cotton plant, such as the seed, are also used to make cottonseed cakes (which are used as feed) and edible cottonseed oil.

Cotton: Contract specifications

Here is a tabulated form of the contract specifications of cotton futures as listed on MCX.

Let’s now move on to take a look at how the cotton futures contract is priced in the MCX.

According to the snapshot from the MCX website, the cotton futures contract is currently trading at a whopping Rs. 21,610 per bale. This price multiplied by the minimum lot size of 25 bales gives us the total contract value for 1 lot of cotton futures, which is Rs. 5,40,250. Now the margin for the same comes up to around Rs. 49,603, which is quite affordable for the average retail trader.

Since the lot size for the cotton futures contract is just 25, for each rupee change in the price in your favour, you stand to gain around Rs. 25. While this might sound unattractive, remember that the price of cotton usually moves by quite a large margin each day, giving you enough opportunities to generate profits.

Mentha oil: An overview

Mentha, also known as pudina, is an aromatic herb that’s widely used in Indian cuisines. The herb is dried and then steam distilled to produce mentha oil. The mentha oil is further processed and filtered to produce menthol, which is used in a wide variety of products as a flavouring agent.

The oil is extensively used in the food, pharma, and perfume industries to give their products the distinct minty flavour. Here’s a fun fact for you. Around 45,000 to 50,000 tonnes of mentha oil is produced every year in India, making it the largest producer and exporter of mentha oil in the world.

Mentha oil: Contract specifications

Now that you know the basics of mentha oil, take a look at the futures contract specifications as listed on the MCX.

Here’s a quick look at the price at which the mentha oil futures contract is currently trading for.

Now, from the snapshot from the MCX website, we can gather that the price at which the mentha oil futures contract is currently trading at is Rs. 953. This pertains to 1 kilogram of the commodity. Multiplying the current trading price with the minimum lot size (which is 1080 kilograms), we get Rs. 10,29,240 (Rs. 953 x 1,080), which is the total contract value. The margin that you would be required to put up to purchase 1 lot of mentha oil futures would approximately come up to Rs. 1,35,953.

So, if you buy 1 lot of mentha oil futures, you get to enjoy Rs. 1,080 for every rupee change in your favour, which is a very attractive proposition.

Wrapping up

So then, that’s about it for agricultural commodities. Before getting into a trade in agri commodities, always ensure that there’s adequate liquidity in the counter to keep yourself protected from adverse situations.

A quick recap

• Trading in illiquid commodities can be extremely dangerous since all of them, barring crude oil, have a compulsory delivery mechanism. 
• If you’re not able to square off your position on time due to lack of liquidity or any other reason, you would either have to take delivery of the commodity or pay a huge penalty for breach of contract. 
• There is only one type of derivative contract for cotton. The lot size for this comes in at 25 bales.
• Contract availability for cotton comes up to 6 contracts each month. 
• There is only one type of derivative contract for mentha oil. The lot size for this comes in at 1,080 kilograms or 6 drums.
• Contract availability for mentha oil comes up to 6 contracts each month.