Commodity Call. The worst is over for castor seed

The year 2015 so far has been turbulent for castor seed. From the peak of ₹5,350 per quintal in December, castor seed prices have tumbled about 33 per cent. Between September and December 2014, prices had rallied by a sharp 35 per cent. So, why did prices fall all of a sudden?

Prerana Desai, Vice President, Research, Edelweiss Agri Value Chain, says prices dropped because of a sudden surge in supply as huge carryover stocks started to hit the market at higher prices.

India accounts for about 85 per cent of global castor oil exports. Almost 90 per cent of the domestic produce is exported.

Demand for castor oil in the global markets is what determines offtake of castor seed. Ministry of Commerce and Industry data show that the export of castor oil and its fractions are down about 22 per cent for the financial year 2014-15 (up to January).

Atul Chaturvedi, CEO of Adani Wilmar, reckons that “Lower demand due to higher castor prices and a sharp 20 per cent fall in demand from China were the two major factors for exports to fall.” He also adds that exports are expected to remain subdued and only a revival in global industrial demand will help prices pick up.

So, where are prices headed from here? Experts feel that castor seed could continue to hover at lower levels for some more time. Prerna Sharma, Research Analyst, Emkay Global Financial Services, says, “Arrivals are picking up now and are at 85,000 to 120,000 bags (75 kg ) a day as against 70,000 bags average daily arrivals. High arrivals are expected to continue for some more weeks which could keep prices subdued.”

However, there is not much downside left for prices as there could be a pick-up in demand from crushers and millers at lower prices. “Farmers will be resistant to sell if prices fall further to ₹3,500 levels and the resultant supply disruptions will support a price reversal,” says Desai. Another factor that will help prices is buying by stockists, as there are good arbitrage opportunities in castor seed. “Castor seed is the only agri product that offers a good arbitrage opportunity. Currently, 12-18 per cent return is possible from arbitrage,” adds Prerna Sharma.

Short-term view: Charts show that the sharp fall since December has paused. The NCDEX-Castor Seed futures contract has been consolidating sideways between ₹3,530 and ₹3,750 since late February. It is currently poised near the lower end of this range at ₹3,588. A breakout on either side of this range will decide the next trend for the contract. A strong break above ₹3,750 will ease downside pressure and take the contract higher to ₹3,960 — the 200-week moving average resistance level.

On the other hand, a decline below ₹3,530 will see the overall downtrend resuming towards ₹3,400 and ₹3,350. Given the preceding trend is down, the bias is more to a break and fall below ₹3,530 in the coming weeks.

Also, even if a breakout above ₹3,750 is seen, the rise thereafter could just be a corrective rally. As such, the upside could be restricted in such a scenario as more selling pressure could come at around ₹4,000 levels. Having said that, another down-move looks likely from the charts. However, this fall will be a good opportunity to enter long positions in the contract.

Medium-term view: The strong downtrend that is in place since late December remains intact. However, there is a long-term trend line support coming up at around ₹3,350 levels which is a strong support level on the chart. It may not be easy for the contract to break below this level. The current downtrend could be nearing a bottom and could halt at this level in the coming weeks. A reversal from here will be bullish. It will have the potential to take the castor seed futures contract higher to ₹4,000 and even ₹4,500 levels thereafter. Traders with a medium-term perspective can begin to initiate fresh long positions at current levels itself. Declines to ₹3,400 can be used to accumulate long positions. Stop-loss can be placed at ₹3,250 for the target of ₹4,000.

This bullish outlook will get negated if the contract declines below ₹3,350. In such a scenario, the downside pressure will intensify and drag the contract further lower to ₹3,250 or even ₹3,100. But such a sharp fall looks unlikely.

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