High spot-futures spread in pepper cheers traders

Traders are opting for arbitrage opportunities in black pepper as the spread between futures and spot has been huge for the past 15 days.

Pepper is being quoted higher in the futures market compared to the spot, thus traders have started buying in the spot market and hedging it on the futures market. The April futures on the National Commodity & Derivatives Exchange (NCDEX) are being quoted at almost Rs 896.65 a quintal higher than the spot market.

Pepper for April delivery on NCDEX ended at Rs 25,812 a quintal, while pepper on spot was quoted at Rs 24,915.35 a quintal.

“Traders are taking advantage of this huge spread and are buying pepper on the spot market and hedging (selling) it on the futures market,” said Ajay Mariwala, a Kochi-based pepper exporter.

This spread between the two markets is helping the traders make good money.

“The spread between the futures and spot markets is expected to narrow by April 20 as the April contract will expire,” said Ajay Kedia of Kedia Commodities.

For this spread to narrow, either the spot prices should move up or the futures should weaken. Faiyaz Hudani, a senior analyst with Kotak Commodity Services, believes the futures market will start to show a correction soon due to profit booking.

Stockists are holding back their stocks in the hope of getting a better price for the commodity in the months to come, which is being reflected in the futures prices.

However, the spot prices have weakened because the export demand for the commodity has also been weak as Vietnam’s pepper is being quoted at a lower price compared to Indian pepper.

Pepper exports are limited as Indian pepper is quoted higher, but India’s pepper output has been lower compared with the last year, keeping prices higher,” said Jojan Malayil, a Kochi-based pepper exporter.

The arrival season has started in Vietnam, which will also cause Vietnam’s pepper to be cheaper.

Indian pepper is being quoted at $6,000 a tonne, while Vietnam’s pepper is at $5,850 a tonne.

This year, the total pepper output was 42,000 tonnes compared with 52,000 tonnes last year.

Also, this year, the pepper exports from April to February have shown a drop of 10 per cent compared to last year.