Trade with Commodities: Commexes’ special margins fail to curb price swings

Friday, May 15, 2009

Commexes’ special margins fail to curb price swings

Imposition Of These Margins On Select Commodities Like Sugar, Soyabean, Turmeric & Potato Have Little Impact

THE imposition of special margins by commodity bourses on select farm products last month may have to an extent softened their prices, but these measures in most cases have had little impact in curbing price volatility, the very purpose for which they were introduced.
    High price volatility indicates that participants with the capacity to hold on to their positions continue to maintain a bullish outlook on the back of market fundamentals of these commodities. On the other hand, trading volumes, a measure of an exchange's business, have come down as smaller traders have been pushed out of the market.
    "I do not think imposition of additional margins have a long-term impact," said Harish Galipelli, head of research at Karvy Comtrade. "If the underlying sentiment continues to remain bullish (on supply shortages), the market rally will resume."
    In April, exchanges such as NCDEX imposed special margins on sugar, soyabean, potato and turmeric futures over and above what a participant has to put up to trade, on concerns of runaway prices in these essential items.
    The exchanges normally impose these margins in response to market regulator FMC's concerns over price distortions.
    However, fundamental supplydemand factors in the case of the current crop of commodities, with the exception of mustard, on which special margins were imposed, have not led to prices falling drastically or price volatility decreasing. In the case of sugar, the price of the near month contract actually rose from a premargin imposition high of Rs 2,297 a quintal (100 kg) on April 13 to Rs 2,304 on May 2, after the margin was imposed! The average price over April and May so far has remained at Rs 2,220, down by a little over 3% from the pre-margin high. Similarly, soyabean futures price has averaged Rs 2,635 per quintal over the same period, down by just 6.2% from the pre-margin high of Rs 2,809.
ET data show that after NCDEX imposed a 5% margin on sugar on the buy side (longs) on April 27, daily price volatility on an annualised basis has declined from 36% to 22.6% recently, which still remains high. In fact, soyabean has witnessed a rise in price volatility from 12.4% to 33.4% after a 10% special margin was imposed on longs on the same date. Interestingly, daily price volatility in mustard, on which no margin was imposed, has actually risen from 24.4% in April to 32.3% recently. The rise in soyabean seems to have had a ruboff effect on mustard as both belong to the edible oilseeds complex.
    Furthermore, average daily open interest — whose level signals the amount of money entering into or out of the market — in running contracts of sugar after April 27 has actually increased to 60,674 tonnes from 49,666 metric tonnes. The third advance estimates of agri production in 2008-09 indicate cane production at 2,892.3 lakh tonnes, down 17% from the previous year. Similarly, average daily OI in turmeric rose from 15,715 tonnes in April to 15,865 tonnes recently. An official from the Kochi-based Spices Board said rough figures indicated a 5-10% lower production in turmeric this year.
    Heightened OI further buttresses the fact that genuine users, or hedgers, are still holding on to their positions.