After Scaling New Peaks

Rahul Oberoi/Money Today | Print Edition: June 2012

A return of 10 times in a year is something most people only dream of. Those who invested in guar seed and guar gum in April 2011 are among the few to have tasted such success.

Guar gum and guar seed rose 1,070 per cent and 970 per cent to record highs of Rs 95,920 per quintal and Rs 29,900 per quintal, respectively, between 1 April 2011 and 21 March 2012.

SPECIAL: Will returns from commodities improve?

To soothe the nerves of investors, the government has said it has no plan to restrict futures trading in any other farm product

This March and April, nine farm commodities -mentha oil, pepper, chana (chickpea), soyabean, mustard seed, refined soya oil, crude palm oil, gur (jaggery) and barley-touched life-time highs.

Should one invest in these commodities now? In other words, will the rally last? It depends, as too fast a price rise can trigger regulatory action that can spoil the party.

For example, smelling heavy speculation, the market regulator, the Forward Markets Commission (FMC), banned trading in guar gum and guar seed in March-end.

"High export enquiry was a major driver of guar gum and guar seed prices. Active participation of speculators was also a reason," says CP Krishnan, wholetime director, Geojit Comtrade.

Further, to curb speculation and volatility, the FMC imposed extra margins and reduced position limits in these nine commodities.

Though later, to soothe the nerves of market players, the government said it had no plans to restrict futures trading in any other farm product.

Let's look at what these nine commodities hold for you.


Oil and oil seeds include soyabean, refined soya oil, mustard seed and crude palm oil. From the start of 2012 till 27 April, soyabean rose 39 per cent to all-time high of Rs 3,472 per quintal, followed by crude palm oil (13 per cent to Rs 621 per 10 kg), mustard seed (8 per cent to Rs 3,950 per quintal) and refined soya oil (4 per cent to Rs 766 per 10 kg). Experts say shortage and falling rupee are behind this.

"Oil and oil seed prices are rising due to shortage of oil seeds in both global and domestic markets. In the domestic market, falling rupee has been a major factor," says Vedika Narvekar, senior research analyst, Angel Broking.

India imports almost 50 per cent edible oil it consumes. A falling rupee makes imports costlier. Between 1 November 2011 and 30 April 2012, the rupee has fallen 7 per cent from 49 to 52.5 a dollar.

Prasoon Mathur, senior manager, retail research, Religare Broking, is bullish for the future. "By and large, prices will remain firm due to tight supply. The long-term trend will depend on the monsoon in June-July, when Kharif crops are sown. The government has forecast normal monsoon. Any delay in monsoon or below-normal rain can again trigger a price rise."

The United States Department of Agriculture says global production of oil seeds is estimated to fall 3.24 per cent and supply 1.47 per cent this year.

"Mustard futures may find stro-ng support at Rs 3,635 (per quintal) and resistance at Rs 4,250 in the near future," says Narvekar. The price was Rs 3,927 per quintal on 11 May.

"The June contracts of refined soya oil and crude palm oil can find strong support at Rs 760 (per 10 kg) and Rs 617, respectively. However, immediate resistance can be at Rs 820 and Rs 674, respectively," says Mathur of Religare Broking. The prices were Rs 756 per 10 kg and Rs 603 per 10 kg, respectively, on 11 May 2012.


From Rs 1,200 per quintal on 2 January, barley touched a record Rs 1,790 per quintal on 18 April. Experts are bullish as production is expected to fall. On 27 April, the price was Rs 1,533 per quintal.

According to second advanced estimates of the Ministry of Agriculture, in 2012, coarse cereal production is expected to fall 1.6 million tonnes, or 3.7 per cent, to 42.08 million tonnes from 43.68 million tonnes last year.

"Estimates of lower output boosted prices in April. On the upside, barley could target Rs 1,900 but face immediate resistance at Rs 1,790 and thereafter at Rs 1,824," says Venkateswaran Karikar, assistant vice president, commodity research, IIFL.


Buoyed by fall in sugarcane supplied to jaggery units and government nod for exporting one million tonnes sugar, jaggery touched a record Rs 1,283 per 40 kg on 21 March.


The main reason for the mercurial rise in jaggery prices seems to be the fall in cane diversion from 23-25 per cent in a normal year to 18-20 per cent.

Venkateswaran Karikar

Assistant Vice President, Commodity Research, IIFL

Dharmesh Bhatia, associate vice president, research, Kotak Commodities, says, "Announcement of sugar export helped gur touch all-time high. However, profit-booking dragged down the price to Rs 1,215 on 28 April. The market is positive for the next two-three months and jaggery can touch Rs 1,260."

After an empowered group of ministers, on 7 February, allowed sugar exports, gur futures rose 9.7 per cent on the NCDEX till 28 April.

Karikar seconds Bhatia. "The main reason for the mercurial rise in jaggery prices seems to be the fall in cane diversion from 23-25 per cent in a normal year to 18-20 per cent."


High demand and falling production took pepper to Rs 43,485 per quintal in the futures market on 7 March.

"Mismatch in demand-supply, low arrivals and high prices in producer countries such as Vietnam and Brazil added to the buoyancy. The expectation of domestic production falling to 43,000-45,000 tonnes compared with 49,000 tonnes last year also supported prices," says Subhranil Dey, research analyst, SMC Global Securities.

{blurb}Vibhu Ratandhara, assistant vice president, commodity, Bonanza Portfolio, shares the view. "Rising year-on-year demand and lower production estimates took pepper to a record in March."

In the spot market, prices rose 34 per cent from Rs 30,821 per quintal on 13 February to Rs 41,347 on 7 March. From there, an 8 per cent fall took the spice to Rs 37,785 on 28 April.

Experts are bearish for the near term and hope a falling rupee can support the commodity.

"We are bearish on pepper. The domestic demand can go down as Indians prefer not to add pepper to their food in summer. However, the falling rupee may attract exporters. The counter has resistance near Rs 40,000," says Dey of SMC.


Lower production estimate pushed up chana prices 18 per cent from Rs 3,341 per quintal on 2 January to Rs 3,948 on 21 March. After this, there was a 7 per cent correction, and on 23 April, the price was Rs 3,670.

According to second advanced estimates of the government, the domestic production of chana this year is likely to be 7.66 million tonnes as against 8.22 million tonnes last year. This is mainly due to falling acreage in Rajasthan, Maharashtra and Andhra Pradesh, the major producing states.

In 2011-12, the output in Maharashtra is estimated to be 7.5 lakh tonnes, down 42 per cent, while Karnataka is likely to produce 4.98 lakh tonnes compared to six lakh tonnes last year.

Market experts are positive. Ramlal Maheshwari, senior research analyst, Fairwealth Securities, says, "The commodity can find strong resistance around Rs 3,950 per quintal. After this, it may rally to Rs 4,300."


Mentha oil is used as a flavouring agent in food and confectionery. Natural menthol cools the skin and so is used in pharmaceutical and cosmetics industries.

Higher winter demand took the oil to its all-time high of Rs 2,565 per kg in the futures market on 9 March. However, it fell 39 per cent after that due to slowdown in export and domestic demand and was at Rs 1,560 on 28 April.


Strong winter demand from pharma firms, high exports and lower production last year doubled prices of mentha oil in Jan-March 2012.

Ajitesh Mullick

Assistant Vice President, Retail Research, Religare Broking

"Strong winter demand from Indian pharmaceutical companies, high exports and lower production last year doubled prices of mentha oil in the first three months of 2012. However, as export and domestic demand slowed gradually, the levels became unsustainable. There were also reports of higher acreage due to high prices that farmers got last year," says Ajitesh Mullick, assistant vice president, retail research, Religare Broking.

In Uttar Pradesh, India's largest producer, the acreage is expected to rise to 210,000 hectares compared to 175,000 hectares last year. Production of mentha oil, 35,000 tonnes last year, is expected to cross 42,000 tonnes due to this. New arrivals are expected from mid-May. Till then, the markets may see more corrections as exporters wait for dips before creating fresh demand.

"The near-month contract should get immediate support at Rs 1,400 per kg while the long-term trend looks bullish despite higher production as export demand is expected to rise by the end of the year. The commodity can break the Rs 2,500 per kg barrier seen early this year," says Mullick.


Application: Guar gum is used to thicken the texture of ice creams. It is used as a stabiliser in cheese, artificial whipped cream and instant pudding.

Return: Guar gum and guar seed rose 1,070 per cent and 970 per cent to record highs of Rs 95,920 per quintal and Rs 29,900 per quintal, respectively, between 1 April 2011 and 21 March 2012.

Temporary suspension:
The National Commodity and Derivatives Exchange suspended outstanding positions in guar gum and seed contracts from 27 March2012, the bourse said in a circular, amid mounting suspicion of foul play after a more than ten-fold rise in futures in a year.

Ban Helps Investors

Suspension of a commodity from trading on exchanges is one way to limit price movement based on speculation. The regulator does this after a detailed study of the price movement.

Before such a decision is taken, exchanges use the margin mechanism to curb price movement in a particular direction. For this, they also limit allowable client- and member-level open positions.

Further, such a decision is never taken in a hurry. The regulator also takes the views of the market before coming to a conclusion.

In light of the above facts, market participants, including investors, get sufficient time to observe the price movement and thus do not get trapped in trades. If any such commodity is in demat form, that can be sold during the given period. Therefore, such a decision helps investors think and take investment decisions on the basis of fundamental understanding.'

- Sushil Sinha, Head, Karvy Comtrade

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