Poor demand, huge supplies may hit chilli

Chilli prices are likely to be stuck in a bear trap for the next one month as traders struggle to sell huge stocks of the spice amid subdued domestic and export demand.

Expectations of a higher output for the new season, beginning August, is also denting sentiments and putting traders in distress. Weakness in spot markets is also likely to be extended to July and August contracts on the National Commodity and Derivatives Exchange (Ncdex).

However, traders said these contracts could witness some bouts of short covering once they approach their expiry period. After testing new highs in spot and futures markets early this year, chilli prices have been in a downward trajectory for the last few months.

June, July and August contracts have eased by over 19 per cent and 13 per cent respectively. Spot price of the benchmark-334 variety, as polled by the Ncdex, has eased by 4.9 per cent during the same period.

"Spot markets are very weak and it will fall gradually as there is hardly any trigger for an upside," Vinaykanth of Guntur-based Vinay Spices said. Over the next one month spot price in Guntur, Andhra Pradesh, the largest chilli market in Asia, is likely to soften to Rs 3,700-3,800 per 100 kg from the current Rs 4,100-4,600, traders said.

August chilli on Ncdex is likely to hover between Rs 3,800 and Rs 4,600 per 100 kg. "Buying interest is extremely poor as buyers are not interested in procuring at the current levels due to extremely poor fundamentals," said Naresh Sharma, proprietor of Mirnal Exports in Guntur.

Also, most buyers had procured the spice when it had tested an astronomical high of over Rs 7,000 per 100 kg, beginning this year. But with the decline in demand, prices started to ease, hence affecting margins of the traders.

"Buyers have already burnt their fingers by buying at higher rates. They do not want to dispose their supplies now," Vinaykanth said.

Buyers are also aware that the new crop, which will hit the markets from November-end from various origins, is likely to be a higher one, prompting them to buy the commodity according to their needs, Vinayak N V, analyst at Karvy Comtrade said.

The prime factor that had aided the surge in chilli prices early this year has petered out, pushing prices into the negative territory. A fall in output in China last year, the largest producer and India's key competitor, had attracted overseas buyers to the country.

However, in rest of the year, exports from the country could come under threat as China is likely to harvest a good crop.

Even though the Chinese crop estimates are not out yet, market is rife with speculation that the neighbouring country may harvest a better crop, thereby taking away buyers from Malaysia, Sri Lanka, and West Asia.

"Prices could see some upside only if China turns out to be a net importer," Vinayak said. However, traders believe that export demand alone will not enable chilli prices to resume its upward journey and would need strong domestic demand.

With falling domestic and export demand, traders battle to sell the huge stocks lying in the cold storages of Guntur, Andhra Pradesh.

"Overall, there are still stocks of around 520,000-550,000 bags of 40-45 kg each. This year the country produced 1 million tonnes of chillies against 6.5 million tonnes in the previous year," Vinayak said.

The new crop for the current season is also expected to be higher by 20-25 per cent since better remuneration for farmers has prompted them to shift to cultivating chillies instead of turmeric and sugar cane, traders said.