February 9th 2012

Futures Trading – The world’s first global black pepper futures contract will go live on February 10, with its launch by the Singapore Mercantile Exchange (SMX), the first trans-Asian multi-product commodity and currency derivatives exchange.

According to exchange sources, this would be “SMX’s first agricultural commodities futures contract, aimed at creating a global benchmark for a commodity predominantly produced and exported from the Asia-Pacific region to the West.”

Vietnam is the largest producer and exporter of black pepper, with 33 per cent and 43 per cent global share respectively, and thus features as the basis delivery centre of the SMX futures contract. The basis grade is origin-neutral 550 g/l black pepper, considering Indonesia, Malaysia and India are also major exporters of the commodity.

So far, India was the only country that conducted futures trading in pepper at the national level exchange through the electronic media, that could be accessed and viewed all over the world. However, from Friday, Singapore’s international exchange would trade pepper to be delivered out of Vietnam bonded warehouses, which means the activity on that exchange would be restricted to Vietnamese pepper alone.

Vietnam has large quantities of pepper — more than 1.25 lakh tonnes — and the bulk of its exports of late have been for 500 g/l faq quality, ever since pepper prices have risen in recent times. There are certain restrictions/controls on the import of such pepper into the US in line with the US/FDA standard and, therefore, it is observed that except for the US, all the other importing countries import the 500 g/l faq grade pepper because of its competitive price in the current high-priced market, the trade here claimed.

Ever since pepper futures were started in India at the national-level exchanges, large operators as well as investors have taken interest in the commodity and, consequently, stocks at the exchange platform have increased considerably, ranging between 4,000 and 6,000 tonnes on an average, they said.

India also tried to establish an international pepper trading hub in its commodity-specific exchange, the India Pepper and Spices Trade Association (IPSTA) at Kochi in the mid-nineties. However, due to restrictions on both inward and outward foreign currency remittances, international players did not warm up to the Indian International Pepper Futures platform and, therefore, the international section was closed down, Mr Kishor Shamji, who was President of IPSTA in those days, told Business Line.

Now that attempts are being made to activate Vietnam pepper with Singapore as a hub, international players based in Singapore, Europe and the US are supporting it as they have their own processing facilities in Vietnam, he said. “This platform could be used by them to activate the international pepper market through this exchange. However, after the initial teething troubles, it is hoped that the Singapore-based pepper exchange could well take off,” he said.

But doubts were still raised by a section of the trade as to how this exchange “would benefit the Vietnam pepper economy in general and Vietnam farmers in particular, given India’s adverse experience of its national-level pepper exchanges, wherein price movements do not have any co-relation to the fundamentals, with the money power of the operators”.

If such operators take control of the international exchange as well, then “it could benefit as well as hurt Vietnam farmers if the prices at the exchange influenced their local prices adversely”. Anyhow, only time will tell how the international pepper exchange will help the world pepper economy in general and the Vietnamese pepper economy in particular, as the exchange is totally based on Vietnam pepper tenderable through bonded warehouses in Vietnam.

The trade here expressed the hope that the new exchange will be managed and controlled properly by a strong regulator to arrest the unhealthy practices being experienced in India by all sections of the trade equally, including farmers, investors, hedgers and exporters.

- The Hindu Business Line.