Wheat spot on fire, futures bearish

NEW DELHI: While the Congress party is training its guns on commodity futures, it is the open markets of Delhi, Karnal and Khanna that are seeing the sharpest rise in wheat prices. In a piquant situation, while NCDEX futures are bearish, spot markets are on fire. What’s more, Delhi is on a hotline with Chicago.

For the first time there is a close to perfect correlation between Delhi mandi prices and CBoT (Chicago Board of Trade) futures, even though NCDEX is not. Till last year, there was a negative co-relation between local Indian prices and the world market.

Wheat is sizzling in the open markets of Delhi and Punjab. On August 1, wheat hit Rs 892.5/quintal in Delhi, Rs 860/quintal in Karnal and Rs 854/quintal in Khanna. Compared to spot rates exactly one month ago, Delhi wheat is more expensive by Rs 31/quintal, Karnal is up by Rs 23/quintal, and Khanna by a whopping Rs 52/quintal.

In contrast, August futures on NCDEX were ruling at Rs 860 on the same day. In other words, there is a decrease in the physical availability of grain which is no longer being reflected by the bearish trend on the bourses.

More importantly, fresh calculations show that there is growing co-relation between Delhi mandi prices and CBoT. Between January and March ’06, the co-relation of increase in prices in Delhi and CBoT was 0.028%. That increased to 0.079% between April-June ’06.

But it shot up to 0.633% in July as the market is increasingly focused on getting supplies from overseas. As more states in the south start depending on imported grain for daily supplies, this alignment is certain to become perfect.

Meanwhile, the increase in open market prices is an indication that India is eating into its stocks faster than grain is entering the market. Though farmers in Gujarat, Uttar Pradesh and Rajasthan are selling grain in the local mandis to disinvest from wheat in anticipation of the forthcoming rice crop, prices are still ruling firm.

“The market will continue to rise till it reaches parity with imported grain. As contracts are being done at Rs 960/quintal levels, spot markets will continue to move up in the north till domestic wheat reaches this price in the south.

So we are expecting a further price rise in September,” said a trader in Delhi. As wheat prices in origins like Ukraine and Canada (and to some extent Australia) are even more closely aligned to CBoT, India’s wheat contracts are expected to move pretty much in tandem with American wheat.

Interestingly, frequent interventions by the government have created a negative carry cost for punters on NCDEX, making it remain undervalued.

Given the steep margin of 21% (which is more than three times the margin on gold) on wheat, along with squeeze on quantities that can be held, both hedgers and speculators are not able to see the correct price of wheat on the tickers. “But this depression is artificial. A correction is certain in the long month contracts,” said an analyst.