Currency Market, Commodity Market, and Government Securities

Lesson -> The Cardamom & Mentha Oil

15.1 - Monsoon Blues

I used to trade stocks with ICICI Direct back in those days. ICICI was also a member of MCX, which had just begun operations at the time. MCX was actively campaigning, and they were holding workshops and seminars to educate market participants in order to increase activity on the exchange. I was still in the discovery phase and curious about all things tradable in India. These sessions were interesting to me as I felt I would be more successful trading commodities than equities.

I was very excited to begin trading commodities. I arrived quickly at the office of my broker with all necessary documents to open my commodities trading accounts. Surprised, I was among the first clients from Bangalore to open an account at MCX. My account was set up with MCX in 12 days, which seemed like an eternity.

Finally, my broker called to let me know that I was ready to go live the next day and to place trades. To trade commodities, I took a full day off work! It was a joy to put my newly acquired commodities knowledge, although it was only a half-baked, into practice.

I traded 'Pepper Futures'. Although the reasoning behind my decision is hazy, Pepper futures was it!

My first commodity trade was "Long pepper", 10 lots (I think it was a 1 metric ton contract). I don't recall the exact price but it was around Rs.7500/- per quintal. My entire trading account was on Pepper futures.

It was pretty predictable what happened next. My dismay, Pepper fell to its 52-week low within two days. I added capital but Pepper crashed further, and my account remained empty until the end.

Dejected, I performed some post-mortem analysis in order to determine what went wrong. It was clear that the monsoons in Kochi were predicted to be strong, which would lead to an exceptional harvest of Pepper.

Only then did I realize that you really need to understand monsoons, harvest cycles before trading agri commodity. This lesson was unfortunately not easy to learn. It's no wonder that I still remember this lesson to this day. J

We will, however, spend some time discussing this topic and hopefully you won't make the same mistakes that I made in the past.

Let me tell you, right after my first commodities trade, my trading account was destroyed. What happened next is simple to predict - Pepper futures reached their bottom and rallied to Rs.12,500/per quintal!

15.2 - Understanding Rainfall

Over the years, India's dependence upon agriculture has declined. Agricultural contribution to India's GDP was over 30% a few decades back, but it has fallen to 10% today. Agriculture and its allied services remain the biggest employers in India. This may explain why the Central Government tends to take a populist approach when it comes reforming and policies in this sector.

Take a look at this snapshot to get an idea of the contribution each sector makes to the Indian economy.

These data are published by RBI. They can be accessed on the RBI website. This data is available as far back as the 1950s. The data can be manipulated to show the sector's percentage contribution. As you can see the percentage contribution to agriculture has decreased over time, while the % contribution to services (mainly software, and allied services), has steadily increased.

Agriculture is still India's largest employer, as I mentioned. This industry and its workforce are dependent on the amount of rainfall that falls each year. This is not surprising, as almost a third of India's arable soil is rain-fed.

India has two major rainfall seasons, the monsoons and the rainy season.

  1. The Southwest Monsoon, which is the principal rainfall season, and
  2. The Northeast Monsoon

These are not my areas of expertise so I won't go into detail about how they happen. These are the essential facts you should know about the two seasons.

  1. The south-west monsoon is a phenomenon that originates in southern India. It covers all regions from central India up to the Himalayas. This spell is expected from June/July to September/October.
  2. The Northeastern Monsoon is a monsoon that covers Northeast India, North India and Himalayas as well as the western parts and large portions of Tamil Nadu. This spell lasts from December to March.

Each monsoon season sees seeds being sown and crops being harvested. The harvest can be estimated based on the quality of the monsoon.

  • The monsoon south-west monsoons are when crops are sown.Kharif CropIt is also known as the monsoon crop. These include rice, pulses, milllets, urad daal, moong-dal, and cotton. Kharif crop is sown in May to June, before the south-west spell. Harvesting takes place after the monsoons (i.e. around October.
  • The northeast monsoons are known for sowing crops.Rabi CropIt is also known as the winter crops. Primarily, rabi crops arewheat, gram, coriander, mustard, oats etc. The onset of winter is the time for sowing rabi crops, while harvesting Rabi crops occurs around April.

India's staple food, wheat and rice, accounts for close to 40% of India's food grain production. This plays an important role in India’s food security. You should note that they are harvested in Karif season and sown during Rabi season, respectively.

Leading publications report on the progress of sowing, harvesting and are continuously updated. Take a look at these -

This report reports on the progress of Rabi crops.

It is important to understand the article and to relate to it. If you're serious about agri trading, I expect you to keep up with news articles and strategies that affect your trades.

These agri commodities can be traded on the MCX:

  1. Cardamom
  2. Castor Seed
  3. Cotton
  4. Crude Palm Oil
  5. Kapas
  6. Mentha Oil

Out of all the agri commodities, I recommend trading Mentha Oil and Cardamom simply for liquidity.

Let's talk about these two commodities. You should also know that agri commodities, especially Indian agri commodity commodities, can be traded until 5:00 PM.

15.3 - Cardamom

Cardamom is a spice that is mostly grown in Southern India (Karnataka and Kerala). "Small Cardamom" is the Indian cardamom variety. India is the 2nd largest Cardamom producer and 1st largest Cardamom consumer, while Guatemala is world's largest Cardamom producer. Guatemala produces Cardamom primarily for export.

As you might know, cardamom is mostly used in Indian sweets. Although it has few therapeutic uses, such as skin and dental care, cardamom is not less therapeutic than savouring sweets.

Cardamom, a Kharif crop, is the basis of demand-supply dynamics.

  1. The southwest monsoons
  2. Quality - the flavour, colour, size and aroma of the harvest
  3. Production parameters - Like inset attack for plantation
  4. Stock is available in both India and Guatemala
  5. Domestic consumption patterns (although it is fairly steady over the years).

Let's have a look at the contract specifications. Cardamom is not like other commodities on MCX. It does not offer two versions. Don't try to find Cardamom or Cardamom mini.

Cardamom's supply and demand are pretty steady. Coincidentally, I just read a news article about this topic, and thought it would be fun to share the same here.

Below are the contact details for Cardamom.

  • Price Quote - Per kilogram
  • Lot Size - 100 Kgs
  • Tick size – Rs. 0.10
  • P&L per tick - Rs. 10/-
  • Expiry - 15 the last month
  • Delivery units - 100 kgs

Here's a quick quote on the Cardamom that expires in February 2017.

As seen here, the price is Rs. 1,564 per Kg. Accordingly, the contract value would be -

Lot size * Price

= 100 * 1564

=Rs. Rs.

Below is the NRML margin.

As you can see, the NRML margin (for overnight positions), is Rs. 16,237/+ This gives it a margin of 10.5% for NRML orders.

As you can see, there is no MIS margin available for Cardamom. There is no MIS margin available for any agri commodity. This is because agri commodities can be volatile and often hit circuit limits. Therefore, it would not be easy to unwind the position at the end of each day. A trader would be better trading NRML intraday.

Here's the Cardamom contract introduction table.

You can see that every month, a 6-month futures contract, is introduced. In January, for example, June futures were introduced. The June futures will remain in the system until June 15th (remember that expiry occurs on the 15th day of each month). It makes perfect sense to trade the current month contract in order to have liquidity.

For example, the Jan 2017 Cardamom contract expired on the 15th January 2017. The Jan 2017 contract expired 15 January 2017.

15.4 - Mentha Oil

Mentha, an aromatic herb, is used raw for Indian cooking. It is also distilled and filtered to make Mentha oil. It is Mentha Oil. It is traded on MCX. It is used in the pharmaceutical, fragrance, food and flavoring industries.

Mentha oil can also be imported to the US, China, Singapore, and other countries. This shows that the Mentha Oil contract is sensitive for fluctuations in USD/INR rates. Other factors, such as rain, insect attack and crop acreage, also have an impact on the contract.

Below are the contact details for Mentha Oil.

  • Price Quote - Per kilogram
  • Lot Size - 360 Kgs
  • Tick size – Rs. 0.10
  • P&L per tick - Rs. 36/-
  • Expiry – Last day
  • Delivery units - 360 kgs

Mentha Oil, out of all the items listed in India is most likely the only one that has Rs.36/– P&L per tick

Here's a quick quote from Mentha Oil expiring in 2017.

As seen here, the price is Rs. 1,023.2 per Kg. The contract value would therefore be 1,023.2 per Kg.

Lot size * Price

= 360 * 10223.2

=Rs. Rs.

Below is the NRML margin.

As you can see, NRML (for overnight position) is Rs. 29,893-. It gives you an 8.5% margin on NRML orders. Mentha Oil is not included in the MIS margin, as mentioned above.

Contracts are presented every month and 5 months ahead. To trade, I recommend that you use the current month contract.

To Summarize

  1. Although agriculture is the second largest industry in India, it contributes nearly 10% to the Indian economy.
  2. India's dependence on rain is still very high when it comes to agriculture.
  3. There are two major rainfalls: the Southwest monsoon (principal rain) and the northeast monsoon.
  4. Kharif is a term for crops that are sown and harvested during the southwest monsoon. Kharif's most important crop is rice.
  5. Rabi is a term for crops that are sown and harvested during northeast monsoon. Rabi crops include wheat.
  6. Agri commodities can be traded on the MCX until 5:00 PM.
  7. India is the biggest consumer of Cardamom and 2nd largest Cardamom producer. Guatemala ranks 2nd in production.
  8. Cardamom demand is stable.
  9. Agri commodities do not have a MIS margin.
  10. Mentha oil is extracted from Mentha leaves and filtered.