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Relevance of Futures for Indian Oil & Oilseed Industry
1. Relevance of Futures
for
Indian Oil & Oilseed Industry
Project Undertaken for:
NCDEX India Project Undertaken By:
GGN Research India
2. Index
1. Introduction
2. Production, Import & Consumption Scenario of India
3. Change in Risk Management Pre and Post Futures market.
4. Contracts available and its Characteristics.
5. How much correlated are the Futures Prices with the Spot Prices
6. Cost of Carry in Futures in Past Four Years.
7. Benefits and Drawback of Indian Futures.
8. Hedging Strategies for Different Industry Participants.
3. Introduction
GGN Research is the first of its kind research company in India which is working on primary research about agricultural
industry and its dynamics.GGN Research provides pragmatic advice backed by thorough research of experienced analysts.
Our research on oil seed complex is very popular and we enjoy the appreciation of the industry from all across the globe. The
company has undertaken several crop surveys, studies on consumption pattern, market trends, provides supply & demand
statistics. We can also be visited on our website: www.ggnresearch.com
A non- biased and grass root statistics that forms a reliable source of information on imports, port stocks, indigenous crop
arrivals etc. (Indian context).
An organized, updated and a well compiled data, which is a basic need, for the study of the commodities.
A Path with the help of which you get the primary and secondary information regarding the edible oil market.
Key Members
The company has been formed by renowned crop statistician Mr. G.G. Patel, Mr. Nirav Desai & Mr. Jai Desai.
Mr. G.G. Patel has spent more than 35 years personally surveying different oilseed crops. Mr. Patel’s statistics are very non-
biased & balanced hence is one of the most preferred crop report of Mr. DORAB MISTRY (world renowned Oilseed
Analyst). Organizations like SEA, COOIT. & other publications treats him as a back bone for their Indian crop figures. Our
company is proud to have a person of such high values & repute to chair us.
Mr. Nirav Desai has experience of 10 yrs in the oilseed Industry, with experience in conducting market studies & other
research activities. He has also vast experience in the futures market of agricultural commodities. A regular speaker on
CNBC Awaz, Zee News and UTVI Bloomberg for his views on commodities . He is also on the product committee and
advisory board of the Commodity futures exchanges. There are several research papers prepared by him in national &
international conferences. He is the member of the crop estimate of COOIT and on the executive committee of SEA.
10. Pre Futures Market
•Market had no unbiased and Independent Price discovery Mechanism.
•Industry did not have any relevant hedge available in their own market and had to either do forward contracts or
hedge in International Futures. So they had to keep the risk on themselves.
•Forward contracts where not regulated and hence there was always risk of contract honoring and Mark to Market.
•The Correlation between the Indian spot prices and International markets were not as desired. Also there was a
currency risk which was open.
•Also liquidity in forward contracts was limited.
•The Industry did not have any clue of what could be the price trend for next few Months.
•Due to lack of a uniform price discovery mechanism the middleman would add up unnecessary cost between the
farmer and the industry.
•Industry had to all time stock up goods and quote a price for forward contracts only after adding the burdensome
cost of actually carrying the raw material.
•This also increased the requirement of capital significantly for the Industry.
Risk Management
Techniques
11. Post Futures Market
•There was a reliable price discovery mechanism that came into existence.
•These Markets are Regulated by FMC(A Govt. Arm), hence ensuring honoring and smooth settlements of contracts.
•Also as these exchanges are online it gives a lot of transparency and facilities which paves a lot of different ways of
trading in the Market.
•Importers could book a sales against their Imports that too in Rupee terms.
•Industry could make forward commitments even without carrying actual goods hence reducing the capital
requirement and ensuring a optimum capacity utilization.
•It became very easy and handy for small traders and other small participants to hedge or trade into futures market.
•Due to far month contract participants get a fair idea the price trend for coming few months.
•The Correlation between the Indian spot prices and Indian futures is very high. Also the basis risk gets reduced
significantly.
•Good liquidity in futures market makes it the right place to trade or hedge.
Risk Management
Techniques
13. Commodity Soya Oil Soybean Rapeseed
Cotton seed oil
cake
Basis Centre Indore Indore Jaipur Akola
Tick Size 5 Paise 50 Paise 1 Rs 1 Rs
Trading Lot 10MT 10MT 10MT 10MT
Quotes Rs per 10 Kg Rs Per Quintal Rs Per Quintal Rs Per Quintal
Tax Inclusive Exclusive Exclusive Inclusive
Additional
Delivery
Center
-
Akola, Nagpur,
Itarsi, Sagar,
Vidisha, Mandsaur
& Kota
Alwar, Kota, Sri
Ganganagar,
Bikaner,
Bharatpur &
Hapur,
Kadi, Harij &
Khamgaon.
Oils & Oilseeds Contracts
14. NCDEX India
Commodity Total Annual
Volume (Fig in
1000 MT)
Current open
Interest*
(Fig in 1000
MT)
India’s Market
Size (Fig in
1000 MT)
Total Annual
Volume V/s
Market size
Current Open
Interest* V/s
Market Size
Soy Refined 17670 225 2,600 7 Times 8.65%
Rapeseed 16164 83 6,800 2 Times 1.2%
Soybean 15349 237 10,500 1.5 Times 2.25%
Cotton oil
cake 19533 983 8,600 2 Times 11.43%
CME-USA
Commodity in
CME
Total Annual
Volume (Fig
in 1000 MT)
Current open
Interest* (Fig
in 1000 MT)
USA Market
Size (Fig in
1000 MT)
Annual Volume
V/s Market size
Current Open
Interest* V/s
Market Size
Soybean Oil 187259 7668 9000 20 Times 85.2%
Soybean 2611336 83912 86000 30 Times 97.6%
As you can see above the Indian futures market have relatively very low depth compared to its international peers.
In Soybean Oil in CME the Open Interest as a percentage of actual market is 85% compared to India it is just a mere 8%.
Open Interest
Volume Vs Market Size
25. Average Cost of Carry – 2010: -0.21% Average Cost of Carry – 2011: 2.28%
Average Cost of Carry – 2012: 1.73% Average Cost of Carry – 2013: -0.51%
Last four year average cost of carry : 0.82% only
Cost of Carry
(1st
Month Futures to 2nd
Month Futures)
26. Average Cost of Carry – 2010: 0.57% Average Cost of Carry – 2011: 0.38%
Average Cost of Carry – 2012: 0.20% Average Cost of Carry – 2013: -2.38%
Last four year average cost of carry: -0.30%
Cost of Carry
(1st
Month Futures to 2nd
Month Futures)
28. • The basis centers are the actual benchmark physical centers which are followed by the market participants to
understand the physical flow of the commodity.
• Hence basis risk is very low.
• To cover the additional supply and demand side and specially supply side dynamics of the market, the NCDEX has
done a good job by putting additional delivery centers, which create near to right replica of the actual physical flows . It
gives the right blend of supply side factors affecting the market.
• The quality specifications are nearly matching the ex-mill or ex-plant specifications in the relevant above markets.
• The quality tolerance also allows inflows of commodity in times when the general crop has minor quality issue
hence avoiding distortion of spot & future prices.
• The dollar price side of hedging a position in international market is also not there.
• The cost of carry in Soybeans and Soy oil is lower than actual cost of carrying.
• Easy access for small players as online terminals are now present in all Important Agri Marketing Mandis.
As you can see in the previous tables local futures are more relevant.
Benefits
29. • Some times in fag end of the season when the end stock is very low, markets become very vulnerable to be governed by
few big participants.
• Open Interest to volume and open interest to actual monthly physical quantity traded, you can interpret, that the Indian
futures market still lack wider market participation.
• Absence of trading participation from banks, mutual Funds and international entities is also felt. That is also a reason for
lower volumes and open interest than its international counter parts.
• No specialist treatment to Hedgers. As hedgers form the most stable part of the Open Interest.
• Forward months volume and open interest are low.
Drawbacks
31. Farmer: Can sell their produce in advance, or can take a decision on which crop to take based on future price trend of
different commodities.
Soybean Crusher:
a) Cover sales Committed.(Long Hedge)
Can long soybean futures to cover the sales of Soy Meal & soy oil done.
The historical carry cost in NCDEX has been significantly lower as shown earlier in the report. This ensures optimizing
your crush capacity.
b) Hedge the Stock (Short Hedge)
In case the Soy plant has stocked up seed in the season time to ensure regular supply to run their plant in off season. So
to avoid price falls in the stock kept they can sell the futures.
Traders: Trader can do a cash and carry Arbitrage if there is good premium on the futures(higher than the actual cost of
carry) or can sell against his stock in bearish times.
Feed Miller: They can cover the bean on futures as a cross hedge of meal and sell oil in futures for keeping a stable price
of the feed or to cover the sales commitment. This ensures a regular processing of the feed mill.
A classic example of hedging is the International trade of Soy Oil and Soy meal .
In this trade nearly all participants hedge their stock as soon as they buy in Argentina/Brazil FOB market, then Charter a
vessel and the reverse the hedge as and when they book sales in destination markets.
Hedging strategies
pertaining to Soybeans
32. Soybean Oil Importer :
From February to July India books import orders of Crude Soya oil From South America which takes 30 to 45 days to
reach India and another 15 days to get refined and be ready to be sold. So carrying a price risk for more than 50/60 days,
the importers can sell the Indore futures keeping in mind the positive margin over the general basis at that time and the
dollar equation.
Soybean Crusher/ Refiner :
Can lock in the crush margin by buying beans on the board, selling the meal in forward market and selling the oil on the
futures.
Packaging Unit /Marketers :
They can buy oil on the futures and sell to their buyers when doing forward bookings, also in bearish times can sell the
minimum stock they have to keep to maintain their supply chain.
Institutional Consumers :
The end users can buy futures and fix up their pricing for a period and can get themselves protected from probable losses
from daily fluctuations when they go to buy in the market. They can regularly reverse the hedge in the same quantity the
buy the physical oil and ensure a steady pricing of the end product.
Hedging strategies
pertaining to Soybeans
33. Farmer:
Can sell their produce in advance, or can take a decision on which crop to take based on future price trend of different
commodities.
Miller :
• a) Cover sales Committed.(Long Hedge)
• Can long Mustard futures to cover the sales of Oilcake/Meal & Mustard oil done.
• The historical carry cost in NCDEX has been significantly lower as shown earlier in the report. This ensures
optimizing your crush capacity.
• b) Hedge the Stock (Short Hedge)
• In case the Mustard Miller has stocked up seed in the season time to ensure regular supply to run their mill in the
off season. So to avoid price falls in the stock kept they can sell the futures.
Trader :
Trader can do a cash and carry Arbitrage if there is good premium on the futures or can sell against his stock in bearish
times.
Hedging strategies
pertaining to Mustard Seed
34. Miller:
Can lock in the crush margin by buying cotton seed, selling the Oil Cake in futures market & selling oil in
forward market.
Trader:
Trader can do a cash and carry Arbitrage if there is good premium on the futures or can sell against his stock
in bearish times.
Feed Miller:
They can cover the Cottonseed Oil Cake for keeping a stable price of the feed or to cover the sales
commitment. This ensures a regular processing of the feed mill.
Hedging strategies
pertaining to Cottonseed Oil Cake
35. • Important to note is that in any hedging there is always a basis risk.
• Basis is the difference between the cash market and the future market or the cash market you are trading in
and the related futures market where you are taking a position.
Eg : A crusher based in Nagpur bought soybean on futures in against his export commitment. When he took
the position in futures NCDEX Futures(which is Ex Indore) were 3500 and Nagpur spot was 3450. So the
basis at the time futures was bought was -50 and when after 2 months the crusher actually unwinded the
hedge and bought physical seed in Nagpur, he sold futures at 3350 and bought physical seed at 3320. so at
the time of unwinding the basis was -30. Hence in this case the basis risk caused a nominal deviation of Rs
20.
Basis Risk