Red chilli likely to be in bear grip in near-term

"If one buys a chana contract for August, which is close to Rs 2470 now, it means about Rs 25,000-30,000 of investment and a hike of Rs 100 will give a profit of about Rs 10,000."

Mr Ashok Mittal of Karvy Comtrade expects soya oil prices to go up. He says fundamentals still support bullish trend for chana (gram). Mr Kishore Narne of Anand Rathi Commodities is bullish on near-term prospects for chana. However, he holds bearish views on chilli in the near term.

Excerpts from CNBC - TV18's exclusive interview with Mr Ashok Mittal and Mr Kishore Narne:

What is your strategy on agri commodities; do you like soya oil the most?

Mr Mittal: We believe that soya oil prices are expected to go up because the Union Government has increased the base price for import duty. Also we are seeing a good amount of export demand coming in.

For example, Malaysia has increased its exports by about 10 per cent last month. Afterthe tsunami, crude palm oil (CPO) prices have been going up there.

If one looks at the August contract on the NCDEX, it is close to Rs 435.

So the strategy here is to buy on dips, probably close to Rs 430 for a target of Rs 445-450, which effectively means that one is getting a profit of about Rs 15. One's investment is about Rs 15-20 per 10 kg in terms of margin, which one will pay.

In a month's time, one would get returns close to 50 per cent on theinvestment. So the downside risk on this is close to 1-1.5 per cent on the price, which means it is close to Rs 5, when one calculates the price. And with about Rs 15 gain, one has a good risk reward ratio, which is 1:3. So, this looks like quite a good investment in terms of agri commodities for the next four-six weeks time.

Have you got a strategy on chana as well?

Mr Mittal: Though the Government was under pressure in terms of prices of pulses, we have a small risk in terms of government intervention. But we feel that there is a good amount of interest from people and now it's become clear that there will not be any stock limit in terms of holding the stocks.

The prices, which fell about Rs 100 a quintal in chana, we expect them to bounce back again because the stock, which is available, about 11-12 lakh tonnes, is not really sufficient. We feel that our prices will continue to rise because whatever import will happen from Australia and other places will take some time, probably by December, and the next crop will arrive in February. So we have a time gap. We will not be able to supply to people who have a genuine demand because for oil and pulses, the demand will increase because of the festival season, which will come in India now.

So again, if one buys a chana contract for August, which is close to Rs 2470 now, it means about Rs 25,000-30,000 of investment and a hike of Rs 100 will give a profit of about Rs 10,000. So here, the risk reward ratio also works very well because the downside or stop loss, that we expected is 1 per cent. So one has a downside of 1 per cent and an upside between 4 per cent, in terms of absolute prices. This also will be able to make good money as prices have dipped very fast because of market rumours. I expect prices to bounce back in the next one-month or so.

Do you think red chillies are the commodities to back now?

Mr Narne: Yes, we are seeing a huge amount of stocks built up in exchange warehouse as well as in private warehouses in Guntur and the surrounding regions. Chilli cannot be stored after a particular time period, as the moisture levels increase and the fungus effect will be seen. Therefore, we will see a lot of selling in the physical markets in the next couple of months.

As per the trend prevailing in the last five-six years, the average chilli price should be somewhere around Rs 2300-Rs 2400. Currently, it is trading close to Rs 5,000. It is almost double the price than what it should be. The situation currently is that the acreage in the next crop is expected to increase by at least 30-40 per centand the sowing will start in December.

At this point of time, we don't have any new crop unless we reach March but still the stock situation is very comfortable and prices are not able to sustain at these levels. We see a major dip of at least Rs 300-400 in chilli prices in the short term.

What about pulses?

Mr Narne: Chana appears to be a very good buy at this point of time. We are also expecting Rs 100-150 upside move in chana prices. Urad is quite a bit on the premium side. The prices are trading at close to all time highs. We have a comfortable situation comparatively in urad than in chana. Stock situation is very good and we are expecting somewhere around 12,000-13,000 stocks of new arrivals due to imports from Burma. We expect the crop in the first week of September. At this point of time, we expect 25-30 per cent increase in acreage in urad and all this means a bearish outlook for urad. We will see short-term weakness in urad and we can make at least Rs 200 on the downside in the near term.

(This article was published in the Business Line print edition dated August 4, 2006)
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