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Basmati Rice Futures

Feasibility Study

Basmati Rice Futures Feasibility Study Multi Commodity Exchange of India Ltd 102 A, Landmark, Suren Road,

Multi Commodity Exchange of India Ltd

102 A, Landmark, Suren Road, Chakala, Andheri (East), Mumbai - 400 093

Tel: 022 66494000 / 26836016, Fax: 022 66494151

Introduction

Basmati Rice, known as the ‘King of Rice’ is the gift of India and Pakistan to the World. The foothills of the Himalayas provide the distinct natural conditions and the soil required for the cultivation of this scented rice. It is estimated that basmati rice has been cultivated in the subcontinent for the past 8000 years. Basmati rice is priced for its characteristic long-grain, subtle aroma and delicious taste. The grain elongates on cooking giving it a characteristic grain shape and integrity.

Basmati rice is the leading aromatic fine quality rice of the world trade and it fetches good export price in the international markets. Infact, Basmati rice is a gift from "Mother Nature" to the Indian sub-continent and grows in the Indo-Gangatic plains only. The meaning of Basmati can be derived from "bas" which means aroma and "mati" meaning sense. Thus the word Basmati implies 'ingrained aroma'. So it is the aroma that gives basmati its novel characteristics unmatched by any other rice grain anywhere else in the world. Many scented varieties of rice have been cultivated in the Indian sub- continent from time immemorial but basmati distinguishes itself from all other aromatic rice due to its unique aromatic characteristics coupled with silky texture of its long grain.

The supremacy of basmati rice can not superceded by any other scented variety because of its unique characteristics viz superfine kernels, exquisite aroma, sweet taste, silky texture, delicate curvature and linear kernel elongation with least breadth and swelling on cooking. Because of its quality characteristics, basmati rice is fetching higher price in the international market. Hence, basmati rice can be equated with "champagne" among wines and 'scotch' among whiskies. During pre-partition times, basmati rice was grown in India only but after partition, its heritage is shared between India and Pakistan. Presently, major growing states of basmati rice in India are Haryana, Punjab, Western U. P. and Uttranchal.

Basmati rice being novel product is characterized by its unique grain size, aroma and cooking qualities. Being high value product, it has got good export demand. Hence, the export has been very high and exports have been steadily growing. The export of basmati rice during 1991-92 was 2.66 lakh mts, a quantum jump of 96.6% at 5.23 lakh mts in 1996-97. During the year 2000-01, basmati rice export touched an all time high record figure of 8.52 lakh mts (provisional) showing on increase of 62.9% over 1996-97. During 2001-02 basmati rice export was 6.66 lakh mts. (Provisional) showing downwards trend compared to previous year's export of 8.52 lakh mts (provisional), but the export of non-basmati rice registered an increase of 124.6% during 2001-02 over

2000-01.

Production

Basmati rice is grown exclusively in the northern part of Western Punjab (on both sides of the Indo-Pakistan border), Haryana and Western Uttar Pradesh. India is the largest producer and exporter of basmati rice in the world. The annual production in the country hovers at around 10-15 lakh tons a year, of which around two-thirds is exported. The remaining is consumed, within the country. The domestic consumption is increasing within the country too. The increased proliferation of branded players in the market has been the main reason for this trend.

Indian Basmati Varieties

Basmati 370

Dehradun (Type 3)

Basmati 217

Basmati 386

Taraori (Karnal, Local, HBC-19)

Ranbir Basmati (IET 11348)

Haryana Basmati (HKR 228/IET 0367)

Kasturi (IET 8580)

Mahi Suganda

 

These are the traditional varieties of basmati, and are protected under the Geographical Appellation Act, 200. The crossbred varieties like the ‘Pusa Basmati 1’, do not qualify as traditional basmati varieties, in international trade.

Basmati Rice Cultivating Districts of India

Haryana accounts for around 50% of the area under basmati rice in India, followed by Uttar Pradesh with 25% and Punjab with 18%.

Basmati Rice Cultivating Districts of India

Haryana and

Karnal, Panipat, Kurukshetra, Kaithal, Amritsar, Fatehgar, Gurudaspur, Hoshiarpur, Jalandhar, Patial, Sangrur, Ropnagar

Punjab

Himachal Pradesh

Kangra, Solan, Una, Mandi, Sirmour,

Rajasthan

Bundi

Uttar Pradesh

Saharanpur, Muzaffar nagar, Pilibhit, Bareily, Bijnour, Moradabad, Jyotibaphule Nagar

Uttaranchal

Rampur, Raibereily, Sitapur, Udham Singh Nagar, Haridwar and Dehradoon

Jammu & Kashmir

In lesser quantities in some areas

The productivity of basmati paddy in India is around 1400-2100 kg a hectares against the yield of non-basmati paddy of 4500-5000 kg a hectare.

Exports

India annually exports around 6 lakh to 8 lakh tons of basmati rice. Basmati rice exports have increased from 2.32 lakh tons in 1990-91 to 6.66 lakh tons in 2001-02. Basmati exports from India peak during March-April period and the November-December period. Saudi Arabia is the largest importer of Indian basmati rice. European Union is the next important market for Indian basmati. The EU buys roughly around 1-1.5 lakh tons of basmati rice on an average.

India’s Basmati Rice Exports

 

Quantity in ‘000 tons

Value in Rs. Crores

1991-92

266.53

499.18

1992-93

324.79

800.64

1993-94

527.23

1,061.26

1994-95

442.13

865.32

1995-96

373.31

850.67

1996-97

523.16

1,247.64

1997-98

593.32

1,685.62

1998-99

597.76

1876.91

1999-00

638.38

1780.34

2000-01

851.72

2165.99

Gulf region remains the major markets for Indian basmati rice and inside Gulf, Saudi Arabia accounts for the major chunk of basmati imports from India. Pakistan is the sole competitor for India in the international market for basmati rice. During 1998-99, 1999- 2000 and 2000-01, total quantities of basmati rice exports from India were 5.98 lakh tons, 6.38 lakh tons and 8.52 lakh tons in which the percentage share of Asia was 85.69%, 82.12% and 73.38% respectively. The percentage share of Asia has decreased for basmati rice, during 1998-99, 1999-2000 and 2000-01 but the export to Europe has increased in linear order from 11.41% in 1998-99 to 14.37% in 1999-2000 and 20.46% during 2000-01 respectively.

The export to North America has also increased in the same order from 1.39% during 1998-99 to 5.28% during 2000-01. However the export to other countries remains constant with slight fluctuation from year to year. India's major markets for basmati rice exports have been Saudi Arabia, Australia, Austria, Belgium, Bahrain, France, Germany, U.K., Denmark, U.S.A., Canada, Belgium, Kuwait, Italy, Oman, Yemen, Netherlands, Jordan, Indonesia etc. Infact, Saudi Arabia traditionally has been the largest market for Indian basmati rice.

There are over 100 varieties of aromatic rice, of which Basmati is the costliest. There are 11 varieties grown in India, of which 4-5 is exported all over the world. But they are area specific. In the Middle East, the parboiled rice is preferred, while in Europe; the brown Basmati rice is preferred. In the U.S., Canada, Australia, New Zealand, Japan and 30 other countries, the white Basmati rice is sought after. India is the world’s largest exporter of Basmati rice, selling about 6-7 lakh tons of the premium rice all over the world every year and has the potential to export 10 lakh tons of the rice. These exports are mostly to Saudi Arabia and other Middle East Countries, Europe, and the United States.

Rice exporters in India have the most modern state-of-the-art technology and facilities. The packaging industry too has taken long strides and is among the best now. Indian exporters are also known for their better and aggressing marketing campaign, which includes quality of the products as well as services. There are about 50 brands of Basmati rice currently being exported from India. “The growing trade also led to the setting up of the Basmati Development Fund (in 1995) whose responsibility include the promotion and protection of the Basmati rice”.

Suitability for Futures Trading in Basmati Rice

The Basmati Rice market is a free market and it is not controlled or regulated. There is an efficient spot market for the commodity, in the major production centres. The major production centres as detailed above are also the major trading centres. Well-developed physical market coupled with presence of large number of market participants ranging from export house, corporate bodies, and traders to farmers already exists. Presence of various corporate such as ITC, Lal Quila, Hindustan Lever, Mahindra Subh Labh and different export house would provide vibrancy.

The prices display significant fluctuation between different production seasons and also within a season. This exposes the traders and exporters to price risks as they usually enter into forward agreements with the importing nations. Several major corporates are also undertaking contract farming of basmati rice. A futures contract in basmati rice, would therefore be able to reduce the risk exposure of both the farmers and the corporates.

Basmati rice grades and quality parameters are more clearly defined than rice quality parameters. This would also be very important for ensuring a successful futures contract in basmati rice.

Well-developed physical market coupled with presence of large number of market participants ranging from export house, corporate bodies, and traders to farmers already exists. Presence of various corporate such as ITC, Lal Quila, Hindustan Lever, Mahindra Subh Labh and different export house would provide vibrancy. With the ease in structural bottlenecks future trading in rice is understood to take off.

Monthly Price Volatility in Basmati Rice Prices at Ambala (1996-97 – 2001-02)

Monthly % Volatility No. of times % Occurrence

<2

2-5

5-8

8-12

>12

6

33.82353 26.47059 20.58824 10.29412 8.823529

23

18

14

7

Projected Turnover of Basmati Rice Futures in India

Presently, 10 lakh tons of Basmati Rice is produced in the country annually. It is assumed that

1. Production figures of Basmati Rice may remain constant over next five years for the sake of convenient calculation, and

2. Prices of Basmati Rice may increase by Rs. 120 per 100 kg, as the rate of inflation in the country is around 4-5%.

Projections of Production of Basmati Rice

 

2004-

2005-

2006-

2007-

2008-

05

06

07

08

09

Annual Production (In lakh tons)

10

Price (Rs./100 kg)

2650

2770

2890

3010

3130

Annual Production (in Rs. crore)

2650

2770

2890

3010

3130

Conservative Multiplier Factor for Futures Trading in Basmati Rice

(% of annual production)

Scenarios

2004-05

2005-06

2006-07

2007-08

2008-09

Optimistic

0.6

0.9

2.1

3.3

3.4

Most-likely

0.5

0.7

1.7

3.0

3.1

Pessimistic

0.18

0.4

0.8

1.8

2.5

In the developed markets, futures trading are normally 10 times that of the production of Rice. Assuming that 50% of the available quantity in respect of Basmati Rice may be dealt with in futures market and taking conservative multiplier factor the projected futures trading is as under:

Projections of Futures Trading of Basmati Rice

(In Rs. crore)

Scenarios

2004-05

2005-06

2006-07

2007-08

2008-09

Optimistic

795

1246.5

3034.5

4966.5

5321

Most-likely

662.5

969.5

2456.5

4515

4851.5

Pessimistic

238.5

554

1156

2709

3912.5

Contract Specifications of Indian White Basmati Polished Sortex Rice

Symbol

BASMATIRICE

 

Description

BASMATIRICEMMMYY

Contract available for trading

January Contract

 

16 th September of the earlier year to 15 th January of the

contract year

February contract

 

16 th October of the earlier year to 15 th February of the

contract year

March Contract

 

16 th November of the earlier year to 15 th March of the

contract year

April contract

 

16 th December

to 15 th April of the contract year

May Contract

 

16 th January to 15 th May of the contract year

June contract

 

16 th February to 15 th June of the contract Year

July Contract

 

16 th March to 15 th July of the contract year

August contract

 

16 th April to 15 th August of the contract year

September Contract

 

16 th May to 15 th September of the contract year

October contract

 

16 th June to 15 th October of the contract year

November Contract

 

16 th July to 15 th November of the contract year

December contract

 

16 th August to 15 th December of the contract year

Trading period

Mondays through Saturdays

Trading session

Monday to Friday:

 
 

1 st session: 10.00 am to 5 .00 pm 2 nd session: 5. 45 pm to 11.15 pm

Saturday: 11.00 am to 2.00 pm

Trading

Trading unit

 

10 MT

 

Quotation/Base Value

Rs./Quintal, Ex-warehouse Delhi inclusive of all taxes

Maximum order size

200 MT

 

Tick size (minimum price movement)

Rs.1

 

Daily price limits

6

%

Initial margin

8

%

Special Margin

In case of additional volatility, a special margin of 2 % or such other percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for next 3 days, after which the special margin will be relaxed.

Maximum Allowable Open Position

For individual clients: 1000 MT

For a member collectively for all clients: 25 % of the open market position

Delivery

Delivery unit

10 MT with tolerance limit of 2 %

Delivery center(s)

Exchange approved warehouse at Delhi

Quality Specification and Delivery Standards

Indian White Basmati Polished Sortex Rice of current year crop with following standards Average length: Above 7.1 mm Broken: 2 % Max on the basis of 2/3 Foreign Matter: 0.5 % Max Whiteness : 38-40 KETT Paddy Grains: 5 grains per Kg Max Moisture: 14.0% Max Acceptable upto 14.5% with Discount on 1:2 basis above 14.5 % Rejectable

Packaging

Basmati Rice should be in 50 Kg new jute bag, machine stiched only. The weight of bags will be deducted out of total truck load, as per terms decided by the Exchange. The cost of bags, as determined by the Exchange will be payable seperately by the buyer to the seller.

Annexures

Monthly Prices of Basmati Rice at Ambala in Rs./100 kg

Month

Price in Rs./100 Kg

Oct-96

3500

Nov-96

3200

Dec-96

3000

Jan-97

3000

Feb-97

2800

Mar-97

3000

Apr-97

3050

May-97

3200

Jun-97

3200

Jul-97

3000

Aug-97

3150

Sep-97

3000

Oct-97

3000

Nov-97

3100

Dec-97

3200

Jan-98

3200

Feb-98

3200

Mar-98

3200

Apr-98

3400

May-98

3400

Jun-98

3600

Jul-98

3700

Aug-98

4000

Sep-98

4500

Oct-98

4500

Nov-98

4600

Dec-98

4000

Jan-99

4000

Feb-99

4100

Mar-99

4100

Apr-99

4200

May-99

4200

Jun-99

4200

Jul-99

4000

Aug-99

3900

Sep-99

3500

Oct-99

3700

Nov-99

3200

Dec-99

2400

Jan-00

2400

Feb-00

2700

Mar-00

3000

Apr-00

3000

May-00

3000

Jun-00

2950

Jul-00

3100

Aug-00

2900

Sep-00

2800

Oct-00

2800

Nov-00

2900

Dec-00

2900

Jan-01

2900

Feb-01

2900

Mar-01

2800

Apr-01

2900

May-01

3000

Jun-01

3000

Jul-01

3200

Aug-01

2900

Sep-01

2900

Oct-01

3025

Nov-01

3200

Dec-01

2600

Jan-02

2800

Feb-02

2600

Mar-02

2700

Apr-02

2900

May-02

2600

Jun-02

2900