Relevance of Futures for

Indian Oil & Oilseed Industry

Project Undertaken for: NCDEX India

Project Undertaken By:GGN Research India

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.

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.

Production, Import & Consumption Scenario of India

Production of Oilseeds

Increase in 11 years 37.7 Lac MT. i.e. 19 % i.e. average increase 1.77% per year

( Fig in Lac MT)

Year 2001/02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13

Oilseeds                        

Groundnut 71 46 70 61 60 54 67 57 48 56 60 44

Soyabean 54 43 69 59 77 77 95 85 85 98 107 106

Rapeseed 49 38 63 67 70 56 44 62 56 68 60 69

Sunflowerseed 9 12 12 16 14 15 14 11 10 7 6 6

Sesameseed 8 6 8 7 6 6 8 5 7 8 8 6

Nigerseed 1 1 1 2 1 1 1 1 1 1 1 1

Safflowerseed 3 2 2 2 2 2 2 2 2 1 1 1

TOTAL 194 147 224 212 230 209 229 222 208 240 243 232

+/- % against previous Year

- -24 % 52 % - 6 % 8 % -9 % 10 % - 3 % - 6 % 15 % 1 % -5 %

Oilseeds Crop (Khariff & Rabi)

Increase in 11 years 1087 Thousand MT. i.e. 19.27% i.e. average increase 1.75% per year

Production of Domestic Oils

Year → 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13

GN 1,208 670 1,010 876 800 575 720 596 384 487 394 146

SBO 765 580 966 837 1,139 1,286 1,445 1,207 1,207 1,633 1,628 1,654

Rape 1,700 1,120 1,745 1,322 2,303 2,061 1,736 1,650 1,703 2,322 1,712 2,064

Sun 305 415 410 429 490 480 490 364 333 229 217 210

Sesame 225 150 186 191 126 122 149 113 158 160 126 117

Safflower 87 60 60 64 64 57 48 48 57 39 27 27

CSO 440 402 500 663 765 923 1,050 1,010 1,100 1,095 1,189 1,166

Copra 120 150 160 93 97 100 105 105 110 115 120 130

RBO-Edible 480 480 575 610 660 680 720 740 700 750 800 850

S.E.Oils 160 160 308 314 330 370 370 340 255 240 200 213

Misc.Edi Oils 150 135 150 137 130 150 170 170 190 200 220 230

TOTAL 5,640 4,322 6,070 5,536 6,904 6,804 7,003 6,343 6,197 7,270 6,633 6,807

+/- % against previous Year

- -23 % 40 % - 9 % 25 % - 2 % 3 % - 10 % - 3 % 17 % - 8 % 3 %

Fig. 000’MT

Increase in 11 years 5886 Thousand MT. i.e. 133.05% i.e. average increase 12.10% per year

Edible Oils Import

Year → 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13

Palm Oil 2,927 3,809 3,413 3,002 2,567 3,171 4,809 6,537 6,498 6,550 7,670 8,280

% of Total 66 % 74 % 78 % 60 % 58 % 67 % 86 % 80 % 74 % 78 % 77 % 80 %

Edible Palm Oil

2,927 3,809 3,413 3,002 2,567 3,171 4,809 6,537 6,498 6,550 7,670 8,280

Soya Oil 1,480 1,197 906 2,027 1,724 1,332 760 988 1,666 1,008 1,082 1,090

% of Total 33 % 23 % 21 % 40 % 39 % 28 % 14 % 12 % 19 % 12 % 11 % 11 %

Sun Oil 3 96 76 5 102 196 26 590 627 803 1,136 920

% of Total 0.07 % 2 % 2 % 0.10 % 2 % 4 % 0.46 % 7 % 7 % 10 % 11 % 9 %

Others Edi.Oils

14 14 - 8 23 14 12 68 32 12 94 20

% of Total 0.32% 0.27% 0.00% 0.16% 0.52% 0.30% 0.21% 0.83% 0.36% 0.14% 0.94% 0.19%

Soft Oils 1,497 1,307 982 2,040 1,849 1,542 798 1,646 2,325 1,823 2,312 2,030

TOTAL 4,424 5,116 4,395 5,042 4,416 4,713 5,607 8,183 8,823 8,373 9,982 10,310

+/- % against previous Year

- 16 % -14 % 14 % -12 % 7 % 19 % 56 % 8 % -5 % 19 % 3 %

Others Edi. Oils : Rape, CSO & Vanaspati Import Up to Jul'13 as reported by SEA & rest estimate

•Groundnut oil has lost the maximum share.•Mustard & Soya Oil has lost share by 5% but the absolute consumption has increased slightly by nearly 5 Lac & 3 Lac tons.•Palm has grabbed the biggest share in the growing Indian oil market. The share has increased by 20% & by 56 lac tons.

Major Edible Oils Consumption-Yearly

YearGN SBO MUSTARD SUN CSO PALM OTHER TOTAL

000T % 000T % 000T % 000T % 000T % 000T % 000T % 000T %

01-02 1,216 12 2,258 22 1,721 17 309 3 443 4 2,944 29 1,234 12 10,125 100

02-03 721 8 1,838 19 1,187 12 503 5 410 4 3,793 39 1,171 12 9,623 100

03-04 894 9 1,864 18 1,713 17 488 5 495 5 3,445 33 1,426 14 10,325 100

04-05 869 8 2,848 26 1,368 13 444 4 664 6 3,079 28 1,618 15 10,890 100

05-06 795 7 2,834 25 2,237 20 580 5 752 7 2,584 23 1,577 14 11,359 100

06-07 593 5 2,656 22 2,091 18 678 6 923 8 3,182 27 1,704 14 11,827 100

07-08 689 6 2,170 18 1,814 15 539 4 1,070 9 4,437 36 1,671 14 12,390 100

08-09 591 4 2,112 15 1,610 11 846 6 965 7 6,392 46 1,543 11 14,059 100

09-10 390 3 2,830 19 1,705 12 949 6 1,142 8 6,362 43 1,456 10 14,834 100

10-11 476 3 2,675 17 2,314 15 1,047 7 1,073 7 6,692 43 1,464 9 15,741 100

11-12 399 2 2,677 16 1,838 11 1,308 8 1,199 7 7,396 45 1,483 9 16,300 100

12-13 148 1 2,719 16 2,043 12 1,171 7 1,130 7 8,552 49 1,527 9 17,290 100

Fig. 000’MT

Risk Management Pre and Post Futures Market

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

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

Oils & Oilseeds Contracts Available and its Features

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

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

How much correlated are the Futures Prices with the Spot Prices

Soybean Correlation

Correlation 97%

Soybean Correlation

Correlation 76%

Soybean Correlation

Correlation 93%

Soy Refined Oil Correlation

Correlation 99%

Soy Refined Oil Correlation

Correlation 75%

Soy Refined Oil Correlation

Correlation 96%

Mustard Seed Correlation

Correlation 95%

Cotton Seed Oil Cake Correlation

Correlation 94%

Cost of Carry on

Oils & Oilseeds Futures

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)

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)

Benefits & Drawbacksof

Indian Futures

• 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

• 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

Hedging Strategies for

Different Industry Participants.

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

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

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

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

• 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

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