Peppered with spicy information

Rajalakshmi Nirmal | Updated on March 25, 2018

All that you want to know about demand-supply and price volatility

Black pepper, referred to as the ‘King of Spices’, accounts for a third of the total global trade in spices.

Pepper is a woody vine. The commercial part of the plant is the fruit — pepper berries. It is grown largely in regions where the climate is hot and humid. India produces about 12 per cent of the total world pepper. The spice crop finds use mainly in food preparations. The oleoresin obtained from ripened black pepper seeds is used in ready-mixes as a colouring and flavouring agent.

In 2016-17, India’s black pepper production was around 65,000 tonnes as per market estimates. Of this, about 50 per cent was from Karnataka, 30 per cent from Kerala (Idukki, Wayanad) and the balance from Tamil Nadu and the lowlands surrounding the southern States. Import and export of pepper vary every year depending on the domestic market production, price and the demand/supply balance. But much of the imported pepper is re-exported after value addition. In the last few years, with increased output in pepper in the key producing countries — Vietnam, Brazil, India, Indonesia, China, Malaysia and Sri Lanka — prices have been moving south. They have dropped from about $9,500/tonne (FOB) in 2015 to $3500/tonne now. In the domestic market, black pepper prices have dropped from ₹600/kg in 2015 to ₹500/kg last year and now sell at ₹390-400/kg.

One way for farmers and others in the trade to hedge against risk from price volatility is to use the pepper futures contract on the MCX.

The new regulations pulled off by the Centre in a hurry, such as the MIP (minimum import price at ₹500/kg) last December, and the move last week to move pepper to the ‘prohibited’ list from ‘free’ imports if import price is below ₹500/kg, are also creating higher price volatility.

Below are some facts on pepper and the MCX pepper futures contract.

Demand-supply scenario

Global pepper production has been rising steadily, led by an increase in Vietnam, Brazil and Cambodia. Vietnam, the world’s largest producer of pepper, accounting for approximately 40 per cent of the global supply now, was producing about 139,000 tonnes of pepper in 2015, but ended 2017 with a total output of 210,000 tonnes. In Brazil, production has increased from 42,000 tonnes in 2014 to 65,000 tonnes in 2017. Cambodia’s pepper production stood at 20,000 tonnes last year, up from around 1,000 tonnes in 2011. Market experts expect a higher supply of pepper from these markets in the current year too, with increase in contribution from the new vines.

In Vietnam though, rains disturbed the development of berries and the yield of many pepper wines has decreased; the younger vines from plantings made in the last two years will help keep up production. All the new plantings made in 2016 in Brazil are expected to contribute significantly to production this year.

In Cambodia, where pepper production has doubled over the last two years, the percentage of increase in net new plantings over the last three years is seen significantly higher. However, the demand picture is not bright. The market expects demand in 2018 to grow only at similar rates of the last few years, which is 2.3-2.6 per cent, indicating a surplus with supply higher than demand.

Futures contract

It is the demand-supply equation that determines price. But if information on global supply and exports/import data is not available, prices of a commodity are bound to be volatile. In pepper too, there is very little information on exports/imports. Though the Spices Board reports it, the information is made available for farmers and the trade very late. Producers and traders of pepper can hedge against price risk or inventory loss by using the futures contract on the commodity exchanges. On both NCDEX and MCX, pepper futures contract is traded.

On MCX, the contract is traded Monday to Friday between 10 a.m. and 5 p.m. The trading unit is 1 tonne. The price of the contract is in ₹/quintal. The maximum order size is 50 tonnes. The initial margin required on the contract is 4 per cent. The delivery centre is Kochi.

Published on March 25, 2018

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