Commodity Analysis

Basmati paddy futures contract launched

Bavadharini KS | Updated on August 18, 2019 Published on August 18, 2019

Pusa 1121 is exported to countries including Iran, Saudi Arabia and UAE

Commodities exchanges NCDEX (National commodities and derivatives exchange) and ICEX (Indian commodity exchange) launched basmati paddy futures — Pusa 1121 variety last month, adding one more commodity to the agri futures.

This is not the first time paddy futures has been introduced in India.

Rice futures was trading in commodity bourses in the country a decade back, but was withdrawn due to the regulator’s concern over speculation on the contract. Paddy prices hitting at that time was reason enough for the then market regulator — Forward Markets Commission — to stop the contract from trading.

However, now, paddy (Basmati) futures have been launched again. Paddy prices are at comfortable levels. Plus, India is producing in surplus; it is among the largest producer and exporter globally. Also, according to industry experts, over a period of ten years, the commodity markets have matured in India and the speculative froth in contracts is not much, as the regulator has put many checks and balances in place.

Contract specifications

The Basmati paddy contract in both ICEX (Paddy Basmati) and NCDEX (Paddy Basmati Pusa 1121) trades Monday through Friday between 9 am and 5 pm. The contract expires on the fifth of every month in ICEX, while in NCDEX, it is on the 20th. One lot of the Basmati paddy contract is 10 tonnes, but the price quotation of the contract is on the value for one quintal. The maximum order size allowed in ICEX is 3,000 tonnes, while in NCDEX, it is 500 tonnes.

At both the exchanges, it is a compulsory-delivery contract with Karnal (Haryana) as the delivery centre. NCDEX contract also has Sonipat (Haryana) as an additional centre. The contract under both has similar quality specifications.

The paddy should be in good condition — dry, clean, wholesome and free from moulds and other impurities. Other quality specifications include moisture content below 14 per cent; foreign matter allowed up to a maximum of 1 per cent and admixture (other variety of basmati paddy) not more than 5 per cent (in NCDEX; 4 per cent in ICEX).

If you want to take positions in the future contract, an initial margin on the contract value has to be paid. NCDEX levies an initial margin of 4 per cent and ICEX also levies 4 per cent and an extreme loss margin of 1 per cent. A special margin may also be imposed on the buy or sell side or both, if the regulator or the exchange finds increased volatility in prices. For instance, ICEX, within a month of launching basmati paddy contract, introduced a special margin of 2.5 per cent on the contract due to increased volatility.

Keep in mind that you need to pay GST (goods and service tax) on the contract value, whether you participate as a trader or take delivery of the commodity.

Delivery procedure

Delivery is to be offered and accepted in lots of 10 tonnes or multiples thereof. A quantity variation of +/- 5 per cent is permitted, as per contract specification. Upon expiry of the contract, all the open positions have to be compulsorily delivered either by giving or taking delivery, as the case may be. In case of positions materialising into physical delivery, delivery margin shall be higher of 3 per cent plus five-day 99 per cent of VaR (value at risk) of spot price volatility or 20 per cent on the long and short positions.

Contract status

Pusa 1121, is among the major varieties produced and exported to countries, including Iran, Saudi Arabia and UAE.

Since the launch of the contract, its price has been declining in both the exchanges.

In ICEX, the Basmati paddy futures fell from ₹4,118 per quintal on July 11th to ₹3,533 per quintal on 14th August. Similarly, in NCDEX, from ₹4,260 per quintal, the basmati paddy futures fell to ₹3,704 on 14th August. This is mainly due to the sanctions on Iran by the US as a result of which Iran’s demand for basmati rice in the global market dropped. Iran accounts for nearly 33 per cent of basmati export from India. Improved monsoon in the rice-growing regions, including Haryana, Punjab and Jharkhand, have also had an impact on the contract price.

However, volumes are yet to gain traction in both the exchanges. The maximum volume at NCDEX was 190 lots on July 11th, which gradually declined. But ICEX has more depth in volumes and over 150 lots every day since its launch.

Published on August 18, 2019
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