The Hindu Business Line : Sugar futures plunge on panic selling

THE Forward Markets Commission's (FMC) directive to massively jack up margins on all sugar futures contracts has triggered heavy panic selling at the National Commodity & Derivatives Exchange Ltd (NCDEX). The extent of unwinding can be gauged from the fact that futures prices have now dipped even below spot prices!

On Tuesday, the January futures contract for Medium Grade sugar had closed at Rs 1,942 per quintal, following which the NCDEX announced a unilateral increase in the margin from 6.8 per cent to 8.25 per cent with effect from Wednesday. The move had a somewhat salutary effect, with prices opening at Rs 1,937 per quintal on Wednesday and moving around that range till the real bombshell came from the FMC in the evening.

The commodities market regulator, apparently on the advice of the Ministry of Consumer Affairs, Food and Public Distribution, clamped an additional margin of 25 per cent on sugar futures, taking the total to 33.25 per cent. As a result, the January contract closed on Wednesday at Rs 1,876. But the bloodbath took place today, i.e on Thursday.

The January contract opened at 1,868, before touching a low of Rs 1,811 per quintal. The February contract, which had closed the previous day at Rs 1,885, opened at Rs 1,875, before plunging to a low of Rs 1,826. Similarly, the March and April contracts, which closed on Wednesday at Rs 1,901 and Rs 1,924, opened at Rs 1,891 and Rs 1,917, before plummeting to their day's lows of Rs 1,825 and Rs 1,806, respectively.

FMC's move to hike the margin by 25 per cent at one go resulted in January futures prices alone falling by a huge Rs 131 per quintal in less than two days. So precipitous was the decline that it led to futures prices being quoted even below the spot price of around Rs 1,920 per quintal at Delhi, resulting in huge backwardation.

"With open interest positions of around 90,000 tonnes and the move to impose margin of over 33 per cent, the traders had to bring in additional margins of Rs 85-90 crore. Since they could not do it, most of them, who included genuine hedgers as well, had to unwind and this caused the huge fall in prices," sources said.

Towards the end of the day, following frantic representations from the trade and also officials from the NCDEX, FMC decided to review the high margin and re-fix it at 15 per cent. As a result, towards the close of Thursday, prices recovered marginally to end at Rs 1,816, Rs 1,831, Rs 1,849 and Rs 1,860 for the January, February, March and April contracts, respectively.

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