Why MCX cardamom futures contract is losing flavour

AN Vijayakumar | Updated on November 25, 2020 Published on November 25, 2020

Value chain participants deprived of benefit due to cost and time of quality testing and increase in initial margin

India is a commodity-based economy and considered as a production hub for various agri-plantation commodities including spices.

Cardamom is a high value agri-plantation commodity produced at Kerala and traded in domestic and international markets. It is also known as “Green Gold” and “Queen of spices” due to its high commercial value and aroma. India is the second largest producer and consumer in the world contributes around 17.5 per cent to global exports. Recently, during this pandemic, Indian spices exports to the world market touched a record ₹10,001.61 crore from April to August 2020 with small cardamom exports of 1,300 tonnes of ₹221.50 crore.

Cardamom trade in India is subjected to regulations of Spices Board under the Ministry of Commerce and Industry, Government of India. The Board introduced e-auction trading system for cardamom with an intention to facilitate transparency and fair competition in the process of price discovery. However, cardamom is prone to various risks of production, yield, quality and prices concerning to stakeholders. The uncertainty in prices affects farmers, processors, domestic traders and exporters, hence, they explore different avenues for managing price risk. Amongst other price risk management mechanisms, commodity futures contracts were also used in cardamom and other agri-plantation commodities across the globe including India.

Multi Commodity Exchange of India Ltd is offering cardamom futures contract since 2006 to facilitate the function of price discovery, price risk management and overall development of the commodity ecosystem. This contract has been offered with standardised contract specifications as against other trading mechanisms to ensure transparent trading process apart from facilitating for creation of benchmark price. However

Average Daily Turnover Value (ADTV) of cardamom futures contract at MCX is sinking continuously from August 2018. In addition, a fresh fall in volumes has been observed from August-September 2019 and reached almost nil volumes at present in the exchange.

Price discovery mechanism

An exploratory research survey finds that, cost of quality testing, quality parameters at physical delivery, delay in getting testing reports and hike in margin money impacted badly the value chain participants comprising farmers, traders and exporters. These participants were using cardamom futures contract for hedging. However, now they were finding it difficult to comply with quality norms revised by the exchange, with effect from August 2018, to meet FSSAI standards for depositing cardamom at recognised warehouse for enabling physical delivery during final settlement of the contract. At the same time, trade participants including exporters were able to trade in spot markets and Spices Board promoted e-auctions without any such requirements or additional hassles for taking/giving delivery. Further, the cost of quality testing at ₹75 to ₹100 per kg (around 5-7 per cent of cardamom average auction price of ₹1,450/kg) is another hurdle as it is taking away profit margin of traders and discouraging participation at cardamom futures contracts.

However, e-auction system and physical trade do not provide an opportunity to mitigate highly volatile price risk of cardamom through hedging process. Moreover, the price discovery process at auction system is restricted with limited participants of specified geographical location. This situation is preventing trade participants from making use of cardamom futures contracts as referral prices as well as for managing high price fluctuations in physical market, in addition to get the benefit of transparent and competitive prices. This is also posing a challenge to processors’ in managing cost due to non-availability of cardamom futures contract for managing price fluctuations, resulting to transfer higher prices of cardamom-based processed products to customers.

In addition, increase in margin money from 4 per cent to 12 per cent in March 2020 also discouraged participation. As cardamom is an agri-plantation commodity generally traded for delivery rather than for investing as financial asset, such high margins to some extent curbed participation from traders.

Policy intervention

Aforementioned factors contributed to the decline in participation and resulted in cardamom futures contract reaching a standstill at an Indian commodity exchange.

However, there is a need for bringing back volumes in cardamom futures contract at exchange terminal to facilitate stakeholders to get the benefit of competitive price discovery and price risk management by hedging process. Therefore, there is a need for policy intervention to match the practices and standards followed in cardamom physical markets and e-auctions to overcome the delay of obtaining testing reports and higher cost of testing.

This situation can be addressed effectively by prescribing exchange or trade specific quality parameters or following trade norms similar to those of Spices Board. In addition, exchange has to organise awareness programs on managing price risk through hedging to benefit cardamom stakeholders. This would encourage higher participation and also supports the efforts of market regulator, SEBI, in making compulsory delivery of cardamom at final settlement.

In addition, it would benefit cardamom farmers, traders, exporters and processors in managing price volatility and increasing financial competency.

The writer is Professor, Indian Institute of Plantation Management, Bengaluru. Views are personal.

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Published on November 25, 2020
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