Castor margins in commodity bourses need a review

In a commodity with strong industrial demand, that is largely export-oriented and in which India holds a very dominant position in the world market as producer, processor and exporter, it is only logical to expect all the value chain participants to derive substantial commercial benefits.

Unfortunately, it is often not so in the case of castorseed and castor oil. India is the world’s largest producer (18 lt-20 lakh tonnes) and crusher of castorseed, the largest producer and processor of castor oil as also exporter of oil (4 lakh tonnes) and derivative products. Yet, the primary producer – castorseed grower – is often at the mercy of speculators who systematically hammer prices down and deny growers remunerative prices. The pecuniary benefit of the country’s dominant position in the world market does not flow to the primary producer in full measure; and unfortunately not many in the value chain seem to be bothered.

Reflecting the sentiment, analyst Dorab Mistry of Godrej International, London, in a recent presentation emphasised that demand for castor oil with varied industrial applications was inelastic with respect to price and currently, the market was facing a supply gap.

It follows that seed prices have to rise and as a result, farmers will benefit. It is worth noting that while Indian exporters ship out castor oil at about $1,250 a tonne, its price in Rotterdam is quoted upwards of $1,550. This huge differential is unjustified and reflects inadequate or lower price realisation by exporters who seem to skim profits through depressed castorseed prices locally rather than squeeze a better export price from overseas buyers.

The huge variation in castorseed production data is not just a cause for concern, but helps fan speculative tendencies. For 2013-14, the Agriculture Ministry’s preliminary estimate shows 18.5 lakh tonnes, down from the previous year’s 21.8 lakh tonnes. On the other hand, the trade estimate is much lower – 12 lakh tonnes for 2013-14 and 11.4 lakh tonnes for the previous year. Anecdotal reports point to even lower numbers.

Whichever number one goes by, seed prices look out of sync with market fundamentals.

Quite apart from vague or inaccurate production, inventory and trade data that are often floated in the market, the policy relating to imposition and varying of margins on buy side and sell side of the futures market willy-nilly contribute to unrealistic prices. Castorseed price movements last month are a case in point. This is seen an area where commodity futures exchanges have to be proactive in addressing perceived distortions. It also calls for a certain domain expertise relating to products and markets. To its credit, NCDEX has taken cognisance of the distorted margin structure - while the sell side margin has been retained at 10 per cent, the buy side margin has been reduced from 22 per cent to 17 per cent. Indeed, there is a case for equalising the margin on the sell side and the buy side in order to create a level playing field, and to ensure that primary producers are not short-changed.

In the last several days, castor growers in Gujarat have started to protest against falling prices and have threatened to reduce the market arrivals unless prices improve. Interestingly, as soon the buy side margin was reduced by five percentage points last week, prices have gradually started to improve much to the relief of growers.

There are important lessons for exchanges and regulators here.