Anuj Gupta, Vice President, IIFL Securities, says future contracts are very useful for hedging the prices by using future contracts. After the listing of this commodity on the exchange, traders are using this platform for hedging the prices. A few days back, we saw unseasonal rain destroy almost 4,000 sacks of Isabgol in Jaisalmer. So the price fluctuation is there and definitely people are using this platform by doing hedging or by taking price reference for further trading.
How can commodity derivatives help the health industry in managing the pricing risks of the Isabgol seed Futures that have just started trading from April. 19? Obviously a lot of benefit comes in from the pharma sector but in terms of pricing, bad weather impacts prices. How can one use commodity derivatives to protect themselves from this volatility?
A few days back, the Isabgol contract was launched on the NCDEX platform with a trading unit of three metric tonnes. After the listing of this commodity on the exchange platform, we saw a very huge open interest, almost 200 contracts, in Isabgol Futures. As Isabgol is a commodity which is used by everyone, be it a medical practitioner, health practitioners, exporters or farmers. The export demand is definitely there, scientific and medicines demand is there, and even export demand is there. So everybody is looking towards this commodity and now definitely the pricing is the major factor for this commodity as this commodity is an international commodity. We can say that this is an agricultural international commodity and this commodity price effect by every instance is related with international trade. It might be geopolitical tension, trade war or some forex price momentum. So the price lock-in anytime is a challenge for the traders.
These future contracts are very useful for hedging the prices by using future contracts. After the listing of this commodity on the exchange, traders are using this platform for hedging the prices. A few days back, we saw unseasonal rain destroy almost 4,000 sacks of Isabgol in Jaisalmer. So the price fluctuation is there and definitely people are using this platform by doing hedging or by taking price reference for further trading.
What are the derivative tools? You did mention hedging coming in, but to prepare a systematic purchase plan and to protect yourself from commodity price fluctuations, what can these buyers, producers and processors do using these derivative tools?
In this Futures contract, generally people are traders, exporters are hedging to lock the prices. If somebody has a commodity physically and if they are expecting that price may fall, they can create a sell position with the same quantity on the future exchange. At that point of time, if prices go down, in the physical market they might face some losses, but as they are shorting positions on the exchanges, they can earn profit on the exchange.
So on one hand, they are losing money and on the other, they are making money. So ultimately, their prices are locking. So for the trader, for the exporter, the price lock is very important. Whenever they export, they trade and so the price quotation is very important. By doing this hedging, they are locking their prices and can mitigate their losses by the seasonal or unwanted price fluctuations.
Could we see the climate impact on Isabgol production in FY23-FY24?
Definitely. See, India produces almost 1,50,000 to 2,00,000 tonnes of Isabgol and which is 80% of global Isabgol seed production. And we are the biggest country who are exporting this Isabgol to the US, China, Europe, Germany and many other countries. The climate changes definitely affect this commodity. As there is the fear of El Nino this year, we are expecting below normal rainfall this year.
If the rain is below average, this would be affected and we will see low production of Isabgol. Due to the El Nino fear, we are expecting low production of the Isabgol. After that, we will see a huge run-up in prices. So climate changes definitely affect the commodity, and in India, it will also impact Isabgol production in the coming time.