Guarseed must not be declared an essential commodity

Recent developments in the guarseed and guar gum market have evoked extreme reactions from several market participants. Some have lost money and some have gained.

Allegations of manipulation have been flying thick and fast. To what extent are these justified? Did the exchange fail in its duty or was the regulator lax? Or is it a case of losers turning complainants and barking up the wrong tree?

In the shrillness of complaints, certain basic facts about the commodity and its market dynamics have been relegated to the background. First of all, guarseed is a highly localised crop and anything but an essential commodity of mass consumption. Its production has been unsteady year on year and prices have been fluctuating depending on whether the market was in surplus or deficit.

For the record, the market this year that is 2011-12 is seen to be in deficit as crop production is estimated to be about 20 per cent lower at 12 lakh tonnes versus 15.5 lakh tonnes in the previous year.

Demand side

On the demand side, newer applications have been found, one of the most important being the use of guar gum (splits and powder) in the oil drilling industry.

According to energy experts, in the last two years, a new process called ‘hydraulic fracking' has been introduced in which industrial guar gum is used as a controlling agent in oil wells to facilitate drilling and preventing fluid loss.

Obscure until a few years ago, the commodity has gained critical importance of late because of rising demand in the mineral oil sector; and given that oil exploration projects are multi-billion dollar business, the price of industrial guar gum – even at record prices in India – forms an extremely minuscule part of the total cost, and therefore virtually inconsequential.

No wonder that notwithstanding rapidly rising domestic prices, the demand overseas has been solid and customers have been readily paying high prices.

Discussion with exporters reveals that overseas buyers have been desperate to source the product at any price simply because India is the world's most dominant producer and exporter of this seemingly wonder product.

Have the stakeholders benefited? Without doubt, growers have been the real beneficiary of rising prices. They may not have realised the full price potential, but have surely received remunerative returns as seen from the upward movement of spot market prices from the beginning of the season starting at close to Rs 5,000 a quintal, steadily climbing through the following months to touch Rs 30,000 in March.

As said earlier, overseas buyers have been ready and willing to pay higher prices for the product as a result of which processors and exporters have benefited. This is clear from rising export price realisation aided by a weakening rupee. For guar gum splits and powder, average export prices increased from Rs 75,000 a tonne in 2010-11 to over Rs 93,000 in the following year.

If two principal stakeholders – growers and exporters – are not really complaining then who is screaming about manipulation in the market?

Apparently, it is the naked short-seller in the futures market. With a large number of futures market participants on the long side (those betting on prices to rise) sitting tight on their positions, the short position holders (those holding sell positions without the backing of physical stocks) were forced to cover their short position in order to avoid further losses.

It is this legion of speculators on the short side in the futures market that has found itself caught ‘short' and crying hoarse about manipulation.

Sharp rise in prices

Clearly, the sharp rise in guar gum prices - both spot and futures - was not an overnight phenomenon. It has happened over a period of several months.

Simply put, many speculators in the market found themselves at the wrong end of the stick.

Not being an essential commodity, guarseed and gum trade has no storage or other restrictions. Those who perceived a big market opportunity merrily accumulated stocks and those who took a wrong trading call (betting on a price fall) lost out. No tears need be shed for speculators. The suggestion to declare guarseed as an essential commodity is laughable.

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