Price difference in paddy stock may hit NSEL settlement

Average price on NSEL was around Rs 28,000 a tonne, while market price ranges from Rs 9,800 to Rs 17,000

For National Spot Exchange Ltd (NSEL), which is facing a Rs 5,500-crore payment crisis, auctioning the stock it holds in warehouses to settle outstanding contracts might not be an easy way. At least the difference between the prices on NSEL when it suspended trade last week and spot prices seems to indicate that. (ALSO READ: FAQs on NSEL payment crisis)

The biggest trouble could be liquidating the massive paddy stock of 509,851 tonnes stored in 10 warehouses of Haryana, Punjab and Andhra Pradesh. At an average price of Rs 28,120 a tonne across different contracts, the stock is valued at Rs 1,433.7 crore. However, the commodity’s price in different mandis across the country on August 3 painted a different picture. According to www.agmarket.nic.in, the official website of the Directorate of Marketing & Inspection of the agriculture ministry, paddy prices ranged from Rs 9,800 a tonne in Uttar Pradesh’s Shahjahanpur to Rs 17,000 in Tamil Nadu’s Kovilpatti.

The value of the NSEL stock could translate into Rs 499.6 crore at the Shahjahanpur price and Rs 866.7 crore at the Kovilpatti price — compared with the original value, a hit of Rs 934.1 crore and Rs 566 crore at the two price levels, respectively. Even if one assumes that NSEL’s paddy stock gets a price of Rs 13,500 a tonne — about the average of the two spot prices — the value would still be about Rs 700 crore less than the original estimated value. And, this is after assuming that NSEL’s huge supply actually finds takers and prices do not fall further.

This hit could upset the NSEL settlement equation. Here’s how:

According to its website, on July 26, NSEL had stocks of 34 commodities in 79 warehouses across the country. While the exchange gave its total stock position as 1.44 million tonnes, it put the value of its total stock at Rs 6,200 crore — Rs 700 crore more than the total due claims of Rs 5,500 crore.

However, an analysis by Business Standard Research Bureau showed the value of the stock, according to the NSEL prices on July 26, stood at around Rs 5,800 crore.

If NSEL takes a hit of Rs 500-1,000 crore on the paddy stock, it might have to dig in deep into its settlement-guarantee fund. But, as the FMC chairman has pointed out, there are restrictions on use of this fund.

Paddy, sugar, raw wool, cotton wash oil and castor seed — the top five commodities according to tonnage — accounted for 84 per cent, or 1.21 million tonnes, of NSEL’s 1.44 million stock; and Rs 4,823 crore, or 83 per cent, of the total value. Of these, prices of castor seed had risen marginally on Agmarket as on August 3, giving an additional Rs 10 crore. In the absence of any other comparable price for raw wool and cotton wash oil, we assume both prices remain as traded on July 26. That leaves us with sugar, which might provide some respite.

But will that be enough? Sugar was the second-largest commodity, with a stock of 476,367 tonnes.

Due to its higher price of Rs 32,460 a tonne, it was the most valuable commodity in NSEL warehouses, accounting for Rs 1,623 crore as on July 26. On August 3, Agmarket sugar prices ranged from Rs 32,280 to Rs 40,000 a tonne.

If one takes the average prices for Rs 13,500 a tonne for paddy and Rs 36,000 a tonne for sugar, the stock in the exchange’s warehouses would be worth about Rs 5,131 crore.

Assuming all the sugar is sold at the higher end, the exchange could get an additional cushion of about Rs 200 crore.

In the other 30 commodities, the exchange might win in some and lose in some. But would it change the picture materially? It seems unlikely.