Quality fears dog chilli traders

MARKET WATCH

After the relaxation of delivery specification for urad futures on National Commodity and Derivatives Exchange (Ncdex) by the Forward Markets Commission (FMC), the focus now is on the chilli November contracts, which will mature on November 20.

Traders fear that chilli stocks at the Ncdex-accredited warehouses are of inferior quality. A fortnight ago, when the trading at Ncdex had come to a halt, owing to technical glitches, chilli, along with pepper, was in the news.

Chilli futures prices had dropped by more than 20 per cent compared with those of the spot market. The news of inferior quality of chillies had triggered the decline in prices. It is the responsibility of the exchange concerned, Ncdex in this case, to ensure that the quality of the commodities as specified in the contracts is available for delivery, said a trader.

Recently, when an Ncdex team had visited Guntur to ascertain the matter of inferior quality of chillies, the local traders were very agitated, the trader added.

The FMC should ensure that Ncdex delivers on the promises and makes sure that sellers deliver the right quality of chillies, even if they have to purchase them from the open market.

If warehouse owners have accepted inferior quality, they will have to bear the costs and make good the losses that buyers may have to incur, added another trader.

Source at the Ncdex said that they will act as arbitrators and ensure that warehouse owners compensate the buyers if the chilli stocks are not as per the specification of the contracts. "They should not end up passing the buck," the sources added.

Analysts said that the case of chilli is different from that of urad. The chilli stock was available and its quality was known when the contract was framed. In case of urad, specifications were changed owing to unavoidable circumstances.

Last week, the FMC had taken an unprecedented decision by allowing Ncdex to relax quality norms for urad futures to ensure that smooth delivery takes place. This had created quite a stir in the market.

"Once a contract is introduced, its terms cannot be changed. But the FMC's decision is akin to allowing copper to be delivered against the gold futures," reacted a trader.

Traders buying from the futures markets, with an intention to take delivery, expect the quality of commodities as specified in the contract. It is immoral to change the specification before the contract matures, the trader added. It was not an easy decision for the FMC.

"We took this decision after long deliberation and this will be an exceptional case," said S Sundaresan, chairman, FMC.

The erratic rains in major urad-producing areas, such as parts of Maharashtra, Rajasthan and Madhya Pradesh, had damaged the crop and with the urad contracts maturing, it was necessary for the regulator to take into account the realities of the physical market, he added.

Lack of good quality urad at Ncdex warehouses had led the FMC to allow the sale of low-quality urad at a discount to ensure that speculators did not misuse the situation.