Guar trade sows a seed of doubt

Speculation, circular trade feed fantastic returns.

Want to earn a fabulous return on your investment? Try commodity exchanges. Investments in futures trading on these exchanges will fetch you astronomical returns.

Consider this: if you had bought guar seed from the spot market on Saturday (September 25) at Rs 1,793 per quintal and sold it in the October futures at Rs 1,922 per quintal, your annualised gross return would be almost 100 per cent.

Taking into account the handling charges (12 per cent annualised), the net return will be 88 per cent. The settlement date of futures contracts is the 20th of every month.

This is not an exception. The prevailing prices of guar seed futures on the NCDEX for the last three months have been yielding similar returns. The prices for October, November and December deliveries ""pegged at Rs 1,922, Rs 2,047 and Rs 2,138 per quintal""will fetch you nearly 100 per cent returns.

An exchange executive said a huge arbitrage opportunity existed and theoretically it was possible to make such money. "Similar arbitraging is also happening in trades of channa, wheat and castor," he said.

Fuelled by rampant speculation and circular trading, a handful of traders are making a killing on the exchange, which started futures trading in guar seed in April.

Industry experts, while driving their points home, cite some oddities: there is no delivery of the commodity on the exchange, the combined trading volume of guar seed and guar gum ""the final product of guar seed"" on the three commodity exchanges is more than the country's annual production.

The combined open position of contracts on guar seed for delivery in October, November and December futures is 176,450 tonnes against the projected availability of 350,000 tonnes.

Industry sources say that the lack of delivery, which indicates huge hoarding, and the spiralling prices of guar seed is taking the export prices of guar gum to such high levels that exporters are not able to compete with other countries.

Consequently, the industry based on guar seed, which has virtually no other use except as a raw material for guar gum, is on the verge of collapse.

Speaking to Business Standard, PH Ravikumar, chairman and managing director, NCDEX, said: "We are aware of the speculative activities and have introduced three types of margins to curb speculation --- real time margin, concentration margin and an ad hoc margin." But he added that the speculation did not threaten to spill into a market risk. "The exchange has a Rs 180 crore settlement guarantee fund and the right risk containment mechanism is in place."

The industry alleges that the NCDEX has unfairly favoured some sections of the trade by accepting bank guarantees instead of cash in settlement.

But an exchange official said: "In order to attract genuine hedgers, the exchange has also introduced the facility where buyers can submit bank guarantees instead of cash margins."

Trade sources said the change reduced the cost for the buyer as the bank took on 70 per cent of the settlement price.

According to market sources, since the level of genuine hedging on the exchange amounts to 1 per cent at most, this change in payment systems is aiding the players to pump in more money into speculative activities.

Industry sources said poor rainfall affected production drastically. Five guar seed producing districts in Rajasthan --- Barmer, Jaisalmer, Sri Ganganagar, Jodhpur and Bikaner --- did not have the first spell of rain and a scanty second spell.

This was the first trigger for rampant speculation. Besides, the entry of jobbers in the market has increased the trading volume sharply. Jobbers now account for 60-65 per cent of the trade on NCDEX.

Ravikumar said the volume would further increase as a large part of the trade was still done outside the exchange informally. "Part of it has started coming to the exchange platform now," he said. Ravikumar also pointed out that the hike in prices was not unusual and in the recent past the prices had risen even to a higher level.

According to him, the concept of online commodity trading through dematerialised accounts is new. "It's difficult to break the established cycle of traders being traditionally hooked to speculation. We expect the deliveries to pick up soon," he said. NCDEX, which has 400 members, records an average daily turnover of around Rs 1,600 crore.

The industry doesn't forsee any threat to the exchange as its risk containment mechansim are in place. A manufacturer of guar gum, who has been associated with the industry for generations, said: "We are also aware that the exchange is safe. But the industry is unsafe, if the rising prices could not be arrested," hinting that the price mechanism system of the exchange was not correct.

The Indian Guar Gum Manufacturers Association is petitioning the Centre to probe the rise in prices on NCDEX, he said.

Ravikumar said the exchange had raised the margin requirement for gaurseeds trading from about 7 per cent to 25 per cent in stages. Now, it is about 17 per cent.