The Hindu Business Line : ‘Curbs on open interest positions hitting pepper exports’

Kochi, Aug. 23 Restrictions imposed by the Forward Markets Commission on open interest positions for members of futures exchanges and their clients for nearby pepper contracts have adversely affected pepper exports, besides giving wrong signal about the pepper market prices in India.

The exporting community is taking advantage of futures trading by hedging their overseas sales. However, since large volumes of stocks are lying at the exchange warehouses, exporters are unable to take delivery and it has resulted in stocks at the exchanges coming down.

The price risk management of the exporters is hampered following the introduction of restriction on the May 9, 2007 for June delivery onwards. This has led to the prices coming down artificially, exporter sources told Business Line.

The brokers’ limits are now 500 tonnes and the individual participants’ limits at 170 tonnes and that is not serving any purpose since brokers’ limits are getting full before the clients’ position reaches 170 tonnes.

In the past, exporters used to take delivery of the larger quantities they were hedging. Currently, due to non-availability of the spot and future delivery and nearby month being traded below market rate by Rs 5 to Rs 7 a kg, exporters are hedging only because of the discounts available and also the quantities at the exchanges.

As a result, it is estimated that India has lost about 1,500 tonnes to 2,000 tonnes pepper export contracts since exporters could not hedge themselves and were not venturing to accept overseas orders, they claimed.

World Prices

The decision of the FMC is actually curbing the genuine operators (investors) from exiting out of the market and prohibiting the exporters from covering their export sales in the futures market. With the continuous decline in the prices here, Indian market has become instrumental in bringing down the world pepper prices at a time when Indonesia and Brazil are heading towards harvest.

Of late pepper futures trading was thrown open to public and the franchisees of the brokers, who were conducting futures trading through electronic system, have started serving as bucket shops.

When SMSs are sent out to buy or sell, it results in big volumes at the exchanges. These volumes in turn create high volatility in the market. The investors who had entered the market during end 2006 and early 2007 wanted to exit. The exporters were ready to take the delivery as spot material was not available in the open market and the futures market served as a good supply source to the exporters.

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