Commodities gain after delivery default penalty cut

A day after the commodity derivatives market regulator, the Forward Markets Commi-ssion (FMC), cut penalty on delivery default in three compulsory delivery commodities, their prices on the National Commodity & Derivatives Exch-ange (NCDEX) shot up sharply.

While all chana contracts hit the upper circuit in the first few hours of trading, the near-month May pepper contract witnessed an increase of 1.2 per cent. The far-month pepper contract for delivery in September jumped 3.4 per cent to Rs 40,415 a quintal. Similarly, the near-month contract for delivery in May of rape/mustard seed jumped 1.31 per cent over the previous day to trade at Rs 4,110 a quintal. The commodity for delivery in August jumped 1.1 per cent to trade at Rs 4,295 a quintal on Wednesday.

“The cut in penalty means lowering restrictions, which generally results in increasing speculation. Speculation in any commodity leads to price rise. Hence, this upward movement in all these commodities can be attributed to the knee-jerk reaction of traders in response to FMC’s decision to lower the penalty on delivery default,” said Atul Shah, chief operating officer of Emkay Commtrade, a city-based commodity broking firm.

Reviewing the penalty structure on delivery defaults by a seller on compulsory delivery contracts, FMC reduced the levy by 50 percentage points to 1.5 per cent from the existing three per cent in case of rape/mustard seed, chana and pepper.

Though FMC’s decision gave a sentiment boost, as they would be keen to take extra risk in case of lower restrictions, analysts attribute other factors to support the price rise. For example, the Commission for Agriculture Costs and Prices (CACP) has recommended a 25 per cent increase in the minimum support price (MSP) for pulses for the kharif season. Consequently, chana prices shot up in the physical market by Rs 225 in the past two days to trade at Rs 3,965 a quintal on Wednesday.

According to Badruddin Khan, an analyst with Angel Broking, chana prices are expected to remain firm due to demand from local stockists. Further, lower output and, thereby, slow pace of arrivals may lead to further upside in prices.

In the short to medium term (10-15 days), chana May contracts are expected to trade at Rs 3,830-4,200 a quintal. Long-term fundamentals remain supportive for chana on the back of supply concerns caused by lower output and growing consumption.

Mustard seed futures on NCDEX traded higher due to improved demand from millers and stockists, coupled with lower production estimates of RM seed this year as compared to last year. Strong gains in other oilseeds and edible oil also provided support. According to the Central Organization for Oil Industry and Trade, the country’s rapeseed output is estimated to fall 12.6 per cent to 6.03 million tonnes this year. In the short term to medium term, the commodity for delivery in May is set to trade around Rs 3,950-4,250 a quintal.