29 January, 2018 GUAR SEED OPTIONS: A BOON FOR AGRI-COMMODITY MARKET

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1 29 January, 2018 GUAR SEED OPTIONS: A BOON FOR AGRI-COMMODITY MARKET

2 Guar Seed Options: A boon for agri-commodity market Shri Arun Jaitley (Hon ble Finance Minister, Govt. of India) launched the Agri Options in Guar Seed in NCDEX. In an effort to make the agri-economy more efficient and bring huge amount of value for the farmers of India, NCDEX has launched the country's first agri-commodity options in Guar Seed. The Union Finance Minister, Shri Arun Jaitley launches the country s First Agri-commodity Options Contracts in Guar Seed on the occasion of Makar Sankranti. According to FM, it is a significant step in the direction of agricultural trade as this will ensure that the farmers will receive a better price for their commodities. Shri Jaitley said that farmers have helped the country to overcome a long period of scarcities to reach the present era of abundance. This launch is largely inspired by the fact that Guar Seed is one of the most liquid contracts on the NCDEX platform and a large number of informal trading Centres in some communities of Rajasthan are already involved in some form of informal options trading, a Finance Ministry statement said. He said that NCDEX Agrioptions are an important tool which will contribute to the Prime Minister s vision of doubling the farmers incomes by The Guar seed is a major contributor to revenue generation for farmers, hence making it a suitable commodity to start with for Options. The Finance Minster congratulated the NCDEX for this initiative. On the launch day, 8,010 tonnes of guar seeds valued at about Rs36 crore were traded. After the launch of gold option, NCDEX is the second exchange to launch option in first agri commodities; Guarseed. Mr. D. K. Agrawal, (CMD - SMC Capitals Ltd & SMC Investments & Advisors Limited; Director SMC Real Estate Advisors Private limited & SMC Comtrade Limited; Vice President - PHD Chamber of Commerce & Industry) also participated a thought-provoking discussion on Agricommodity markets, a panel discussion was also conducted by NCDEX. He thanked to SEBI for giving approval and also thanked to NCDEX for introducing Options on guar seed futures, which will provide new age hedging tool in the hands of the farmers. He said it will be a game changer in the Agri-Commodity markets by helping the farmers in better price realization and risk mitigation. SMC has punched first trade in Guarseed Option. Mr. D K Aggarwal (CMD, SMC Investments & Advisors Ltd. & Chairman & Director, SMC Comtrade Ltd.) in a panel discussion during the launch of Agri Options in Guar Seed in NCDEX on 14th January 2018 at Hotel Taj Mahal, New Delhi. 1

3 Guar Seed Options: A boon for agri-commodity market NCDEX is the second exchange after MCX to launch options trading in gold in October NCDEX also launched Mandi.com, a mobile app for farmers where they can learn more about Options and the commodity markets. Around 15 lakh farmers are associated with this commodity. Agri-Options will serve as a powerful tool to empower farmers by allowing them to lock in the prices of their produce at a minimum cost. It will benefit more farmers across the country for their hedging requirements. Why need option? Few months ago, only instrument available for commodity price risk management in India was futures. Options have long been awaited by the Indian commodity market and it was expected that its existence would boost overall market participation, especially the hedging community. It will also complement the existing futures contracts and make the commodities market more robust and efficient. Options are a trade contract which gives the buyer the right, but not the obligation, to buy or sell an asset on a specified date at a predetermined price. No Mark-to-Market required to be paid by buyers of Options. Hence, Options work as a Safety Net (or Insurance plan) for hedgers, who buy Options and this is a cost-effective hedging instrument. The combination of options & futures both risk management tools can give market participants the leverage of futures with the safety of options. They give the option buyers the opportunity to limit losses, but ensure profiting from favorable changes in the futures prices. Thus, use of options will complement the existing futures contracts and make the commodities market more robust and efficient. With the presence of both futures and options, market participants can devise various hedging strategies to effectively hedge their risk exposure. The combination of options & futures-both risk management tools-can give market participants the leverage of futures with the safety of options. Availability of options would create the opportunity for banks to offer new, innovative and customized derivative products, suiting the hedging requirements of their clients, possibly enmeshing credit products with hedging products. Options give hedgers a form of insurance determined by the strike price of the option. Since options carry virtually no downside risk, such risk management products are much-needed in a diversified emerging economy like India s with a preponderance of small stakeholders who are risk-averse and need these products the most. Key information: Guar Seed Options Options contracts expiring in the months of February 2018, March 2018 and April 2018 are available for trading w.e.f. January 14, The Guar Seed Options will be European type with a tick size of Re per quintal. The Daily Price Range (DPR) will be based on the factors of DPR of the underlying Futures contract and volatility. Options contract shall be launched on the trading day following the day on which the underlying Futures contract is launched. Position limits will be 36,000 MT and 3,60,000 MT for clients and members respectively. The expiry date of agri-options will be the last Wednesday of the month that proceeds the month of expiry of the underlying Futures contract. However, launch calendar with exact date of expirations shall be notified in advance. To promote the options the exchange has decided that the Transaction Charges and Risk Management Fees on Options Contracts on Guar seed will be waived till further notice. Options contracts expiring in the months of February 2018, March 2018 and April 2018 are available for trading w.e.f. January 14, Transaction charges on devolvement of the Options Contract at the time of expiry into a corresponding Futures Contract will also be waived till further notice. Approved by the Securities and Exchange Board of India, the hedging tool was initiated for guar seeds to deepen trade and improve price realization for farmers

4 Guar Seed Options: A boon for agri-commodity market Turnover of Guarseed option Monthly chart of Guarseed Future Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec Jan Open Interest Quantity Traded (MT) Notional Value (in Lacs) 14-Jan Jan Jan Jan Jan Jan-18 Source: NCDEX Source: Reuters 3

5 Guar Seed Options: A boon for agri-commodity market Fundamental of Guarseed Guar or cluster beans is a legume and its processed gum is widely used in the food and fracking industry. Rajasthan is a leading producer of cluster beans. Guar is a rain-fed crop, sown in July-August and harvested in October-November. According to first advance estimate data released by major guar seed producing states like Rajasthan, Haryana and Gujarat, the production sum at lakh tons against lakh tons a year ago. India accounts for per cent of the total global production of the commodity and sets the price for guar products. Guarseeds are processed to guar gum and exported to various countries which are into oil and gas exploration. The export market for guar gum is pegged at Rs 3,000-4,000 crore. India accounts for per cent of the total global production of the commodity and sets the price for guar products. In days to come, another catalyst of demand for guar gum will be increasing use of Food Emulsifiers especially in the European and Asia-Pacific markets. According to a report, the global food emulsifiers market demand was kilo tons in 2013 and is expected to reach 1,019.8 kilo tons by The Asia-Pacific Food Emulsifiers Market is projected to reach USD 720 Million by 2023, at a CAGR of 3.8% during the forecast period from 2018 to Sophisticated food processing techniques by developing countries and demand for new ingredients in food processing has driven the food additives market. A populous country like India, with more than 1.2 billion people, is a major potential market for food emulsifiers. In 2017 guar complex gave it s investors a decent yearly return, with 26% & 44% from guar seed & guar gum respectively. Guargum Export (in lakh ton) Apr-Dec 4

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