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Wednesday, Jan 12, 2005

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Open interest positions in sugar futures dip

Harish Damodaran

New Delhi , Jan. 11

THE National Commodity & Derivatives Exchange Ltd's (NCDEX) move to clamp higher margins on futures trading in sugar has seemingly helped quell excessive speculation in the commodity.

An indication of this is provided by data on daily open interest positions on sugar (M-grade) contracts at the NCDEX. On November 1, the total outstanding open positions on all active contracts for that date (November, December, January and April) amounted to a mere 9,150 tonnes. On December 1, these had risen to 15,800 tonnes (including the 6,050 tonnes of the December contract).

But it is the subsequent period that witnessed an explosive build-up, with the outstanding open interest positions almost doubling to 29,690 tonnes on December 15 and then to 68,340 tonnes on December 30, before peaking at 87,810 tonnes on January 4.

The sudden surge in open positions since December, particularly pronounced from the second half — that too, without any new information on supply or demand fundamentals pouring in — obviously suggested that the trading taking place was largely speculative in nature.

Another indication of excess speculation was that the closing price of January 2005 futures, which stood at Rs 1,643 per quintal on November 1 and Rs 1,693 per quintal on December 1, had soared to Rs 1,968 per quintal by December 31.

Following this, the NCDEX was forced to jack up the margin on open positions in all sugar contracts from 6.8 per cent to 8.25 per cent with effect from January 5 morning, which was further hiked to 33.25 per cent by the evening. The margin was, however, relaxed to 15 per cent from January 6 evening.

The measures have had their intended effect. As on January 10, the total open interest positions on all M-grade sugar contracts have come down to 63,000 tonnes, from their peak January 4 level of 87,810 tonnes.

A significant part of this has been brought about by the squaring off of the January contracts, which are due to expire on January 20.

This is a normal phenomenon, given that once a contract expires, sellers having open positions can exercise their right to deliver the underlying commodity, which the counter party buyers are bound to settle by taking physical delivery.

But apart from the January contracts, there has been a decline in open interest positions on those for February, March and April as well since January 4.

Also, the prices in all contracts have fallen by Rs 120-130 per quintal from their end-December highs.

"Though the exchange authorities and the commodity markets regulator were somewhat late in taking appropriate action, there is reason to believe that the speculative bubble has now been contained," analysts noted.

The analysts also felt that the recent speculative bull run in sugar cannot be compared with what happened earlier in the case of guar seed.

In guarseed, open interest positions on all contracts have even touched 2.5 lakh tonnes (lt), which is roughly half of the country's production.

On the other hand, the maximum open position in sugar of 87,810 tonnes represents only a fraction of this year's expected consumption of 180 lt.

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