The Hindu Business Line : One year on, rubber futures here to stay

IN the past five months, Prof Paul Mathew has made a profit of Rs 7,500 with an investment of Rs 25,000 trading in rubber. All that money without selling a single sheet of rubber from his 10-acre plantation.

"I have been taking positions in the futures market and selling them at a profit," Prof Mathew says. "I have no great knowledge of the stock market. And there are no other good investment options. I know the rubber industry and where else to invest these days?"

It's been one year since futures trading was kicked off in rubber. Under this mechanism, buyers and sellers can enter into contracts to buy/sell rubber at a future date for a price they agree today.

The seller need not have physical custody of the rubber at the time of entering into the deal as he is expected to deliver it only at a future date. Both parties need to pay only 10 per cent of the value of the contract as margin money. In between, depending on the prevailing prices, parties can buy and sell the contracts many times or may even square off without having to sell/buy the physical rubber.

Since it was started in March 2003, volumes in the rubber futures trading have surged to nearly 2,000 tonnes a day, translating to a value of Rs 10 crore at current market prices.

According to Kochi-based Geojit Infofin Technologies, which pioneered rubber futures a year ago, aggregate volumes in futures trading are over 3.24 lakh tonnes, valued at about Rs 1,600 crore.

Only about 5 per cent of the total trade is delivered since the very purpose of futures contract is to provide price-risk protection, say officials at Geojit. In the market in developed countries, this is only about 1 per cent.

Prices in the futures trading do have a bearing on the current market prices. "Today, farmers have an idea how prices might behave in the next few months by tracing the futures market," says an industry expert. "This has insulated them from worries of a drastic drop in prices and helped them avoid panic selling."

Nevertheless, futures trading is yet to attract the attention of big-time buyers such as large tyre manufacturers as they are yet to come forward to buy rubber through this method.

Also, "middle-class" farmers such as Prof Mathew have not been able to take the complete benefit of futures trading, apart from making money from the margins, since they need to have a minimum quantity of one tonne of RSS 4 grade rubber and licences from the Government to physically sell the commodity.

"Preserving a semi-perishable commodity for months is not always feasible. It also involves labour and additional costs. Then you have to incur the transporting costs to deposit the rubber at the Central Warehousing Corporation," Prof Mathew points out.

Absence of any collective effort from the farmers, through regional co-operating societies, etc., is telling on the futures trade. Having to go through administrative processes to obtain licences also deters many growers.

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