With the Forward Markets Commission lifting its ban on futures trading in guar gum, prices of the agri-commodity look set to once again rise. But guar gum may not achieve the distinction of capturing one-third of trading volumes on the bourses again for some time, thanks to curbs imposed by the commodity markets regulator to prevent price rigging.

Price control a dampener

While the price controls may dampen volumes in the short-term, the natural gum’s key role in shale fracking — the innovative technology that has made the US a gas surplus nation — is likely to outweigh any deterrents over the long-term. Most importantly, the key driver of guar gum prices in recent years has been exports demand, not only for fracking, but also the food industry.

India is the world’s largest producer of guar, the cluster bean from which guar gum is manufactured. Total production has averaged around 6 lakh tonnes in the past two years, during which guar gum has been the highest export-earning agricultural commodity for the country.

In 2009-10 and 2010-11, exports only amounted to $300-500 million. But in 2012-13, exports are estimated to have been worth $3.4 billion, around the same level as the previous financial year. The sharp rise was on account of the increasing demand for guar gum from the oil and gas industry due to its chemical characteristics.

Consequently, guar trading has been generating huge volumes, which eventually attracted unwanted attention from price manipulators. Guar gum rose by nearly 900 per cent in the futures market, from Rs 11,230 a quintal on November 11, 2011, to Rs 98,350 a quintal in March 2012.

Trading was hitting the upper circuit almost every other day during February-March, 2012, and prior to delisting on March 27, 2012, guar gum volumes peaked at Rs 1,00,195 a quintal on the NCDEX in December 2011.

After the resumption of trade on May 14, guar gum for June delivery was quoted at Rs 28,150 a tonne. On May 15, it traded at Rs 27,370 a quintal. But this seems as much an outcome of poor demand as it is the stringent conditions imposed by the FMC on trading of the commodity.

New contracts, margins

Under the new contracts for guar gum, the initial margin required to trade is 10 per cent, or the Standard Portfolio Analysis of Risk (SPAN), whichever is higher. Furthermore, predefined special margins are included in contracts as an additional risk measure.

The special margin of 10 per cent, over-and-above the initial margin, will be imposed if prices rise by more than 20 per cent. Further, for every 10 per cent rise in prices, the special margin will increase by 10 per cent. As such, if prices increase by more than 50 per cent, a special margin of 70 per cent will be imposed.

Global demand for guar gum is muted at present, with oil companies expected to have amassed significant stocks to meet their requirements for the time being. Substitutes to guar gum have also been found, giving the oil companies the wherewithal to make a switch in case of price spikes.

But the cost of these substitutes is more or less at par with guar gum. What is more, the oil company’s stocks will not last beyond the current marketing year, necessitating procurement of fresh supplies if their operations are to continue. Farmers in India, too, have refrained from selling their stocks in the open market for some time, having received word that futures trading was likely to get the green signal again.

If they are able to maintain their resolve and resist the temptation to dump stocks, prices will inexorably rise. To that extent, the controls imposed by the FMC on guar gum trading do not predicate a rise in prices in international markets, in which case prices in the futures market at home will also rise appreciably.

arvind.jayaram@thehindu.co.in

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