New Delhi, FUTURES trading in sugar at the National Commodity & Derivatives Exchange Ltd (NCDEX) is coming under the scanner yet again. If in December and early January, it was the allegedly speculative rise in prices that forced the Forward Markets Commission's (FMC) intervention, this time round it is sustained selling pressure, which is said to have triggered off alarm bells in official quarters.
Over the last month - between March 29 and April 29 - prices of M-30 grade sugar at the NCDEX have fallen from Rs 1,935 to Rs 1,818 per quintal for the May 2005 futures contract, even as the June 2005 and July 2005 contracts have similarly shed Rs 126 and Rs 132 per quintal, respectively.
The more distant April 2006 contract is quoting as low as Rs 1,740 per quintal.
In fact, the May 2005 futures had quoted a low of Rs 1,794 per quintal on April 25, before it recovered to Rs 1,831 per quintal by April 28, following the Government's announcement of a reduced free sale quota of 11 lakh tonnes for May.
But the recovery was brief, as on April 29, prices fell again and closed at Rs 1,818 per quintal. "The outlook is rather bearish, which is unusual for this time when mills have stopped crushing and prices normally start looking up.
"This is just the reverse of the bull run that took place 4-5 months back, when, ironically, the crushing season had begun and prices, instead of falling, surged by about Rs 300 per quintal," sources pointed out.
According to them, one reason for the sustained bearish pressure now has to do with the very design of the futures contract at the NCDEX, "which is heavily loaded towards the sellers".
In the present scenario, the seller has the right to deliver sugar on his open position upon expiry of the contract, though there is no obligation for him to do so.
On the other hand, the corresponding buyer with open position is obliged to take physical delivery in the event of the seller exercising his right, failing which the exchange would enforce the same through cash settlement.
"While the buyer has no choice but to take delivery when offered, there is no certainty whether the seller will offer delivery either.
"Moreover, the seller is not even required to liquidate his open position on delivery day, as there is automatic settlement subject to his paying a small penalty of 0.5 per cent on the final settlement price in case of non-delivery," the sources said.
Taking advantage of this "one-sided" contract specification, most players, including a few leading sugar mills, are taking a bearish position, as it is perceived to be risk-free.
Everybody is selling short because they always have the option of not delivering at the contract price, if they find that spot prices are ruling higher on the due date.
As a result, there is heavy selling pressure at the exchange, which is getting transmitted to the spot market. "The trading volumes at NCDEX may not be all that large, but the prices there have emerged as a benchmark for stockists and other large buyers," the sources added.
Delivery by sellers may be made compulsory
THE Forward Markets Commission (FMC) is said to be looking into making deliveries by sellers compulsory for futures trading in sugar at the NCDEX.
The move follows concerns reportedly expressed by the Ministry of Consumer Affairs, Food and Public Distribution over the apparent lack of level playing field between sellers and buyers, with the onus for squaring open positions now solely being with the latter.
While compulsory delivery may impact trading volumes, an alternative proposal doing the rounds is to increase the extent of penalty on non-delivery by sellers from the existing 0.5 per cent.
-Harish Damodaran
Hindu Business Line
Date: 2 May, 2005
