Precious bean: Guar caught in a vicious cycle

Tags: Commodities
Precious bean: Guar caught in a vicious cycle
Earlier this year, prices of guar seed skyrocketed due to strong positive fundamentals. Strong demand from overseas and inadequate supplies caused the prices to edge higher in the futures and spot markets. Unrealistic price moves in the futures market led the Forward Markets Commission (FMC) to take strict measures against excessive speculation and suspend the commodity from the futures trading platform in March. Guar seed prices traded steady in the spot market after the suspension.

According to CP Krishnan, whole-time director at Geojit Comtrade, the commodity is likely to trade with a mild positive bias in the New Year. Expectations of lower-than-estimated output and relaunch of futures trading could probably assist the prices.

“If FMC gives permission to launch guar complex futures, it could further raise liquidity on the counter. At the same time, availability of cheaper alternatives in the international market will remain a threat to price rise. Still, guar seed prices are likely to trade broadly in the Rs 10,000-Rs 14,000 per quintal range,” he added.

Rising guar prices have the world’s largest oil and gas producers worrying over their profit margins. The reason is simple. In the form of gum, guar is used as a thickening agent to push fluids sideways in the hydraulic fracturing process, called fracking.

The commodity is in high demand and short supply, making it expensive for frackers. But it has changed lives for poor Indian farmers who produce about 85 per cent of the world’s guar output. In 2011, guar emerged as India’s largest agricultural ex­port to the US, with sa­les of $915 million, ac­cording to USDA.

Last year, the oilfield services sector in the US alone used as much as a 500,000 metric tonnes of guar powder, a four-fold jump from the 2006 level, according to the US industry data.

The shipment of the commodity has gone through a rough patch last year. Elevated price levels in the last financial year and early this year curbed export demand, and drillers even started looking for alternatives. Consequently, prices crashed significantly, and exports are likely to fall in the coming year too.

The area under the guar seed sowing is 36.4 lakh hectares this year compared with 34.4 lakh hectares last year, as per government sources. Guar seed production for this year is expected to be 19-20 lakh metric tonnes.

Also, farmers have begun to get together and hoard the produce to sell it at the price they want. They have found a leader in the CMD of India’s largest gum producing group, Vikas WSP, BD Agarwal, who recently issued an advertisement in Rajasthan’s leading regional newspaper asking farmers not to sell their produce as the prices are likely to go up further.

According to NCDEX, the prices of guar seed and guar gum shot up nearly 40 per cent within a fortnight after farmers decided to hold their stocks. Farmers decided to form a cartel after prices fell below Rs 9, 000 a quintal for guar seeds and Rs 25,000 a quintal for guar gum.

The recent volatility in guar seed and guar gum prices has raised concerns for Indian guar processors, who fear losing their export market. The industry is operating at 10-20 per cent reduced capacity. Some of the companies have practically become non-operational. This is posing a serious threat to all the stakeholders in the value chain.

“Expectations of re-launch of guar complex futures and outlook for lower production in the coming year could possibly support guar prices in the coming year. During calendar 2013, prices will perhaps trade in the Rs 10,000-14,000 per quintal range,” said Krishnan of Geojit. zz

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