FMC levies 20% margins on mentha oil to control price rise

Faced with widening spread between two contracts because of speculation, the Forward Markets Commission (FMC) has levied a 20 per cent special margin on mentha oil contract for delivery in February. The margin in the form of cash on long (buy) side is being levied with effect from February 25. A circular issued by MCX also said FMC, the forwards and futures markets regulator, had banned fresh position in mentha oil’s February contract with immediate effect.

Mentha oil’s February contract gained 18 per cent in the last one month and closed on Saturday at Rs 1,525 a kg. “Interestingly, the spread in the February and March futures has crossed Rs 200. The spread is the highest level we have seen in the last five years ahead of the arrival season,” according to Ajay Kedia, managing director of Kedia Commodity, a Mumbai-based broking firm. Normally, this spread was Rs 20-40 only.

Traders say the accredited quality control agency has rejected some of the mentha oil stock for delivery at a time when sellers have increased sell positions in the February contract on MCX. With the rejection of stock due to quality-related issues, those who have sold earlier failed in delivery, while buyers who are said to be exporters were insisting on delivery to complete their export commitments. This has lead to short-covering in the February contract, while prices in the spot market at Chandausi also went up because exporters who could not secure delivery on exchange came for buying in the spot market.

This has resulted in the March contract trading at huge discount to February contract. Lower price in March also indicates that expected new crop arrivals are higher in line with earlier market expectations. To control excess speculation, margins have been slapped on buy side so that in the current contract new buyers cannot come and rig prices further. Meanwhile, farmers are holding their stocks with the anticipation of higher prices in near future similar to last year when they earned handsome returns for their inventory, said Kedia.

According to the traders, the total area under mentha crop cultivation is expected to remain 20 per cent higher at 210,000 hectares this year against last year’s level of 175,000 ha. Also, mentha oil output is estimated to be proportionately higher at around 65,000 tonnes this year, compared to 53,000 tonnes last year

Sowing for mentha crop is expected to be completed by the end of February. High stock levels had ensured a fall in rates for the commodity over the last few days. On February 19, total stock of mentha oil at MCX-monitored warehouses at Chandausi was 80,177 kg of which 78,017 kg was physical stock. At Barabanki, the total stock was 780, 526 kg of which, physical stock accounted for 702,031 kg and demat stock was 78,495 kg. With this action, prices are likely to cool down soon, said a trader.