Futures Market For Castor Oil Likely To Help Exporters

India has emerged in recent years as a dominant player in the global production of castorseed and exports of castor oil. India's castorseeds production peaked around 9 lakh tonnes last year, accounting for almost two-thirds of the world output.

Of the country's total castor oil production of nearly 3.3 lakh tonnes, as much as 2.3 lakh tonnes or approximately 70 per cent is exported. In the aggregate world exports of castor seeds and castor oil, India's share is quite high at 80 per cent. India has now achieved a near-monopoly status in the global castor economy.

Madhoo Pavaskar, an expert on futures trading, said: In fact, considering the virtual dependence of the Indian castor economy on exports, the budget announcement for the international futures market in castor oil as a risk management instrument need not have provoked any controversy.

 

For, under conditions of free market competition and price volatility, commodity futures markets are essential for maintenence and promotion of exports.

Castor oil exports are often made as early as three to six months in advance of the actual shipments.

Many a time, such commitments are made well before the harvesting of the castorseed crop. A sharp rise in prices of castorseed and castor oil during the intervening period jeopardises seriously the profitability of such exports.

In such circumstances, entering into hedge purchases in a futures market against the export commitments provide the much needed cover against the risk of price increases.

Still, a section of the export trade believes that since India enjoys a near-monopoly position in the global exports of castor oil, the country does not need any hedging facility, Pavaskar added.

Yet, the question is whether this has endowed on India the role of a price setter?

Disappointingly, the answer is decidedly 'no'. Though, it may seem so when one considers the remarkable breakthrough in castorseeds production attained by the country since 1989, and the consequent phenomenal growth in India's share in the world castorseed production and castor oil exports.

It seems to have led to a fall in the world prices of castor oil. The price of castor oil, ex-tank Rotterdam, which averaged around $1,114 a tonne in 1989 slumped rapidly to $761 in 1992. Even though it recovered temporarily to $912 in 1995, it is presently quoted at $760 a tonne, despite the reported fall in India's castorseed production to 7.5 lakh tonnes this year.

This clearly indicates that the global castor oil market is not a sellers' market as some Indian exporters like to believe.

If the Indian exporters still remain engulfed in an illusion that because of their dominant positions in the world castor oil market they can dictate prices to the buyers, they will only encourage the use of competing oils and substitutes to the detriment of the domestic castor economy in general and castorseed growers in particular.

The downtrend in prices has not been due to India's near-monopoly status but due to a corresponding decrease in prices of synthetic substitutes and competing products.

The development of an international futures market in castor oil will provide the much needed hedging facility to not only Indian exporters, but also to importers.

Far from fearing that such hedging use by importers would depress world castor oil prices, it should be encouraged as it would give a fillip to importers to buy more oil without the risk of any loss on account of the possible fall in prices later.

Incidentally, besides importers, major stockists of imported castor oil in international centres like Rotterdam as well as castor oil end-users all over the world would also make hedge sales against their stocks. Such hedge sales would be put through, especially when the futures price is higher than the spot price by an amount which is approximate to the carrying costs.

That would enable the stockists to earn their storage charges. So far as hedge sales are concerned, whether by importers or stockists or end-users, instead of discouraging immediate spot or forward sales of physical goods, they would necessarily tend to support the spot prices.

It is rather erroneous to believe that hedge sales by overseas buyers in the proposed international castor oil market would depress castor oil prices to the detriment of Indian exporters and castorseeds farmers.

An international futures exchange would also prompt importers and other overseas end-users of castor oil to dictate the prices of their imports or future requirements by entering into anticipatory hedge purchases.

Such purchases would inevitably support the fututes prices and indirectly the spot prices as well.

Either way, be they hedge sales or hedge purchases, it seems incorrect to believe that futures market operations of the overseas buyers of castor oil would adversely affect the interests of India's exporters and growers.

In reality, such operations would actually give a strong fillip to castor oil exports.