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I am a commodity trader from Adoni, Andhra Pradesh. I trade in physical cotton. Given the rising payment risk from spinning mills and their likely default situation, as well as the price risk in cotton, I want to go for an alternative commodity. Since groundnut is also traded in Adoni, I want to learn the basics before I get into it. What is the variety of groundnut traded in Adoni? How do traders test the quality and bid for it? How does one mitigate payment risk and market risk through the exchange delivery mechanism?
Anand, Adoni, AP
To mitigate the price risk in cotton trading, you could consider hedging your exposure in the futures market. Cotton futures are traded on the NCDEX and the MCX. For instance, say, you have procured 500 bales of cotton from an agent in the mandi in October at a price of ₹16,000 per bale and you will be selling it to the spinner only in December at the price prevailing on that day. Now, to cover yourself from the risk of a price fall during this period, you can hedge through cotton futures. You can sell 20 lots (equivalent to 500 bales) of the December month contract in cotton.
Let us say, you are able to sell 20 lots at a price of ₹16,300. By December, prices in the cash market drop to ₹15,500 and the December month contract price also falls and it trades at ₹15,800. So, you buy back the contract at that price and make a profit. This will make good the loss you suffered in the cash market.
The groundnut variety in Adoni is called ‘Kalyani’. The peak arrival season is September to December. The second season starts by the first week of February and goes on till April, but arrivals in this season are much lower. Quality testing in groundnuts is done manually. If before de-hulling the weight is 100 gram, after de-hulling, the weight of a good quality crop should be at least 70-75 gram. Also, the colour should be bold pink.
Traders BusinessLine spoke to indicate that there is no major payment problem in groundnut in the Adoni market as in the case of cotton. Payments are made in cash immediately in most cases. Traders in Adoni buy groundnut from commission agents through an e-bidding process and later sell it to processors or they themselves process and sell it to domestic user companies or exporters.
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