Speculation in soy products under scanner

Meeting today to review adequacy, as futures contracts show price rises despite FMC raising margins successively on soybean, soymeal

The Union ministry of consumer affairs has convened a meeting tomorrow to assess whether more needs to be done to cool abnormal speculation in sensitive agricultural commodities, in the wake of much action this month by the Forward Markets Commission (FMC), the commodity derivatives market regulator.

Through successive measures, FMC ordered an increase in trade margins in soybean and soymeal from 10 per cent and five per cent, respectively, to 50 per cent and 45 per cent, between July 19 and now. This came in the wake of minister K V Thomas directing it to take measures in commodities which had recorded abnormal price rises. The alternative to raising the margins would be ordering a suspension of trading in the commodity.

In fact, market participants fear the regulator might suspend futures trading in soybean and soymeal. A margin is the amount of money a client has to deposit in a brokerage account before trading a futures contract. The amount varies on each commodity and fluctuates with market volatility. There is an initial margin amount required when entering a contract and a "maintenance" margin amount that must be kept in the account at all times during the contract holding period, typically lower than the initial margin. Over and above, the exchanges, in consultation with the regulator, revise the margins depending upon the requirement of the trade, from time to time.

These two commodities were under the MCA’s scanner for a long while, due to their exorbitant price increase since the report of a below normal monsoon rainfall this season. While soybean contracts for near-month expiry jumped 13.1 per cent to close on Monday at Rs 4,472 a quintal on the National Commodity & Derivatives Exchange, soymeal on the Kotak-anchored Ace Derivatives & Commodity Exchange has shot up 22 per cent in the past month, to settle the day at Rs 41,092 a quintal.

The price movement in soybean and soymeal indicates a repeat of the story in guar, when the regulator raised margins to over 70 per cent and a price spurt continued on massive speculation. The regulator later put a restriction on its trade in the futures market. Futures trading in both guar gum and seed was discontinued till the new crop hits the market in October.

However, unlike guar, soybean and soymeal have supportive fundamentals. The India Meteorological Department has estimated a 22 per cent below normal monsoon rainfall, which also began with a two-week delay, resulting in proportionate delay in sowing of soybean. The already sown crop is also expected to be affected, with low germination due to the rainfall deficiency. Soybean is a rain-fed crop, sown with the monsoon onset in June, for harvesting in early October.

Still, the monsoon has revived in central India and, hence, soybean sowing might go up, said Atul Chaturvedi, chief executive officer of Adani Wilmar Ltd, one of the largest processors and merchandisers of cooking oil. Consequently, overall soybean output is estimated to rise to 11.4 million tonnes as against 11 mt in the previous year.

Agriculture ministry data showed that farmers had cultivated soybean over 8.62 million hectares as on July 20, compared with 9.03 m ha during the same time a year before. Analysts say the cultivation should accelerate, with the weather department expecting more rain this week in the key central Indian state.

Prices are also pushing up on global factors, said an analyst. The International Grains Council has slashed its US soybean output forecast for 2012-13 by 9.5 per cent to a five-year low of 79 mt, as a severe drought is wilting the crop in the Midwest. Production was estimated at 83.2 mt in 2011-12 and is projected to fall for a third year in succession.