Castor seed futures: price action requires better understanding of market dynamics

Did the regulator act in haste or panic in the matter of the recently imposed special cash margin on castor seed futures contracts?

While commodity derivatives market regulator SEBI might have had concerns arising out of price volatility, it appears that the directive to the exchanges to impose a special cash margin of 20 per cent on the long side with effect from March 27 was issued without a clear understanding and appreciation of the current fundamentals and dynamics of the castor market.

The facts speak for themselves. Following high production and burdensome inventory, for four years castor seed rates generally ruled at relatively low levels, falling to as low as ₹3,100 a quintal exactly a year ago.

Castor seed growers were the worst hit by low prices. This year they responded as they usually do and in the only way they know.

Growers reduced planted acreage by a fifth and, as a result, castor seed output has reached multi-year lows.

For 2016-17, the trade estimate of castor seed crop production is 10-11 lakh tonnes, well below the 14 lakh tonnes produced last year.

Lower production and falling inventory are a sure recipe for a price action; and this is exactly what’s happening in the market. The market has taken cognizance of tightening supplies and so, prices have gained upward traction in recent weeks. The castor seed grower is the primary beneficiary of the price rise.

Clearly, there is no argument against the fact that the market fundamentals support a price rise. However, when prices touched ₹5,000 a quintal, the regulator seems to have panicked. Perhaps the events that led to suspension of castor seed futures (market concentration issue) last year still haunt the regulator.

The current situation calls for a clear unbiased understanding of the market fundamentals. Also, it is unclear if any lobby pressure was brought on the regulator to curb the price rise.

World leader

India is the world’s dominant producer of castor seed and exporter of castor oil, to the extent of meeting 90 per cent of the world’s needs of this versatile industrial oil.

With this kind of a near-monopoly status, India should actually draw maximum mileage by maximising export prices (follow the ‘what the traffic can bear’ principle) and maximising growers’ returns.

Over the year, we have failed to do both — failed to capitalise on our dominant position in the world market and failed to deliver remunerative returns to growers here. To be sure, following the rise in domestic prices of castor seed, castor oil export prices have risen sharply to $1,500-1,600 a tonne FOB, an increase of $300-400 a tonne from the levels a year ago.

The price rise means seed growers are happy and castor oil exporters are able to draw higher prices from overseas buyers, resulting in higher foreign exchange inflow. Interestingly, foreign buyers are not complaining or have not stopped buying.

It is necessary for the regulator to possess sufficient market knowledge and product knowledge as well as good understanding of global and domestic market dynamics. Without evidence of that, action emanating from the regulator will be up for close scrutiny and criticism on merits.

The writer is a global agribusiness and commodities market specialist. The views expressed here are personal.

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