FMC intervention helps rein in punters in castor seed futures

MUMBAI: Excessive speculation by a few powerful financial investors in castor futures has been curbed because of strong regulatory intervention. The speculative trades had resulted in outstanding trader positions hitting 3.5 lakh tonnes — almost a fourth of the 15-lakh-tonne annual crop — in a single contract last month and pushed prices to uncompetitive levels for exporters.

Companies like Adani Wilmar and Jayant Agro-Organics, which crush castor seed and export the oil to lubes and paint makers across the world, are partly relieved as they feared they wouldn’t be able to procure sufficient stocks because of over speculation on the futures market.
The speculators, said industry sources, aimed to mop up stocks on the physical market and simultaneously take bullish bets on the futures market, making it difficult for sellers to deliver seed on the futures exchanges and, thereby, manipulate prices. Once the prices rose to a desired level, they planned to square off their positions on the futures market at a huge profit.

On the spot market, too, they would sell accumulated stocks at a huge profit. However, in a move that spooked the speculators, Forward Markets Commission, regulator of commodity futures, directed bourses to impose a pre-expiry margin of 5 percentage on an incremental basis daily, against a normal 5% trading margin, from December 26 to the expiry of the contract on January 20 on buyers and sellers alike. They were also directed to allow staggered deliveries to commence around three weeks before the contract expiry, instead of the normal 10 days.

"Strengthening of regulation and risk management over the past three years has made the threat of delivery very credible and become effective in preventing powerful cartels from manipulating the market," said Ramesh Abhishek, FMC chairman. The extended time gave sellers more time to arrange for delivery while the rising margin forced many speculators, who played with borrowed money, to exit their positions.

Such was the concentration of trading in castor that open interest (OI) soared to 3.5 lakh tonnes on December 19 — 23% of the annual castor crop of 15 lakh tonnes in the January contract alone. At that point, castor deposits in exchange-accredited warehouses were just 2.05 lakh tonnes. After the regulatory intervention last month, OI on Tuesday was 67,610 tonnes and warehouse stocks 3.91 lakh tonnes.

As a result, the castor price has fallen 10% from a contract high of Rs 5,295 a quintal (100 kilos) three weeks ago to Rs 4,769 intraday on Tuesday.