Kochi: Margins introduced by commodity exchanges and curbs instituted by the commodity markets regulator on the quantity of pepper that can be held in futures contracts have combined to wreak havoc in the futures trade.
Exchanges trade six-month futures contracts of pepper. Traders and exporters buy and sell these contracts, depending on their future needs. In May, the Forwards Market Commission (FMC), the commodity market regulator, halved the quantity of pepper that can be held in futures contracts. Commodity exchange members now can have either a buy or sell contract of 1,500 tonnes and other clients 500 tonnes. This has seen exporters and traders scrambling to liquidate their positions. They had to limit their positions by Wednesday as the June contract ended on the 20th.
The consumer affairs ministry met FMC and traders on Tuesday to address the issue but exporters are unhappy over the regulator sticking to its stance despite their making a representation over a month ago.
The June contract was quoting at Rs137 a kg and July futures at Rs142 on Wednesday.
Traders liquidating their position from the June contract to the July were making Rs5 for every kg of pepper. The difference till a week back was around Rs2. Meanwhile, the spot price has risen to Rs140. Normally, spot and futures prices tend to converge as the contract for the month expires.
Global players are keenly watching the scene and waiting to source pepper from India. Currently, India is the main supplier for this commodity and has a competitive edge, says Kochi-based exporter Kishor Shamji.
While Indian prices for pepper are at $3,750-3,800 (Rs1.54-1.56 lakh) a tonne, Brazil has been selling at nearly $3,700, Indonesia at $3,900 and Vietnam at $3,850.
Because of the limit imposed by FMC, exporters who had made commitments in advance cannot take delivery to meet their orders. It is customary for the exchanges to deliver the commodity after the expiry of the contract for the month. Since limits have been imposed, exporters are being forced to liquidate their positions.
The pepper associations of competing countries such as Indonesia, Vietnam and Brazil are convening a meeting in Jakarta on 25 June to review the present international market scenario. “It is a routine meeting but the volatility in the Indian market and lower prices in the futures market will be discussed there and can send wrong signals,” Shamji adds.
As part of a move to curb volatility in the market, two exchanges National Multi-Commodity Exchange (NMCE) and National Commodity Exchange (NCDEX), had introduced special margins from 20 April at 25% of the amount when a trader buys pepper and 20% when he sells, from a flat rate of 11% and 9.5%, respectively. This was beside the daily mark-to-market difference being paid for every increase in price.
M.L. Parekh, president of the oldest exchange India Pepper and Spices Trade Association, feels that the FMC ought to have spared exporters from this. According to the government’s trade promotion body Spices Board, the export target fixed for this financial year was 30,000 tonnes, up from 28,250 tonnes.
“Given the present situation in the futures market, exporters are buying from the spot market as they are not allowed to take positions in futures. This is jeopardizing their export obligation as supply in the spot market is low, Parekh adds.