Key agri futures drop below spot mart rates

Futures prices have, for the first time, gone below spot prices in widely traded commodities on national derivatives exchanges.

This follows a shortage in the physical market, a slowdown in open interest in futures because of a slackening season and issues, including frequent changes in margins.

Unlike in futures, in the spot market, prices move according to physical demand and supply.

On Multi Commodity Exchange (MCX), spot prices of 11 commodities, including guargum, maize, masur, furnace oil, pepper, red chili etc, are higher than the near month futures of respective commodities. There are five such commodities on the National Commodity & Derivatives Exchange (NCDEX) as well. These include cotton seed, guargum, jeera, sugar M etc.

Guargum has been quoting lower for the last one month due to bumper crop estimates for guarseeds following intermittent rains in major producing centres including Rajasthan. On the other hand, the physical market remained tight owing to ongoing sowing season.

The guarseed harvesting season starts in October and ends in April. Hence, with April approaching arrivals become thinner. Seed sowing season starts in July-August and arrivals start soon after Diwali.

But, demand is expected to touch 1,60,000 tonne this year owing to increasing demand from China. Domestic consumption is also expected to rise substantially to 55,000 tonne this year from 40,000 tonne last year.

Open interest for the August guargum contract came down 7830 on July 31 from 8790 on May 31 against the general market sentiment that open interest goes up when the expiry date nears.

The latest to join the trend of the futures prices running behind the spot prices is cuminseed, which is rising in the physical market owing to a sudden spurt in exports to global markets on account of West Asian crisis. The buyers from Western markets have diverted their procurement from India "� the world's largest producer "� after Syria's exports dwindled amid the Lebanon crisis.

The world's largest cuminseed trading yard at Unjha, in north Gujarat, has attracted a demand for 2,500 tonne exports in the last one month compared with almost no demand for domestic cuminseed during July 2005. But, the movement of futures prices has slowed down mainly owing to the expectations that the Syria's exports will resume soon.

India as a net importer of tur and the domestic trade depends upon the 2.5 lakh imported goods compared with about 13 lakh tonne produced domestically. Although the domestic variety of tur is deliverable in place of Burmese tur, the physical market needs adequate supply to keep futures prices in line with spot prices.

"Today, prices of essential commodities are passing through a lean period which will be overcome in the next month," said Suresh Nair, vice-president, Kotak CSL Research.

In the case of wheat, despite the government's decision to free imports by direct wheat consumers, physical supply is short in the spot market resulting in higher prices. India's wheat production of 64 lakh tonne last year was short of industry estimates of 75 lakh tonne.

"When the demand of a commodity is much higher than the supply, the price is bound to go up. What commodity exchanges would do in that case? The commodity exchanges are purely meant for price discovery where traders may offload in case the price in spot is higher than futures and vice-versa," Suresh said.

"The prices of some commodities have witnessed a rampant increase because of manipulation. But, Indian commodity market has only one component "� speculators, compared with three essential components "� speculators, strong regulator and powerful regulatory mechanism," he added.