Cardamom and Mentha Oil Trading Analysing and understanding in the Indian Agri Commodity Market

Cardamom & Mentha Oil

 Understanding Rainfall

The Indian economy has lessened its reliance on agriculture over the years. Many decades ago, it accounted for around 30% of our GDP, but this has since been reduced to roughly 10%. Nonetheless, agriculture and associated services remain the biggest job providers in India. This could be why the Central Government habitually adopts a more popular approach when making reforms or policies for this sector.

Take a gander at the graph below; it gives an insight into how much each sector contributes to the Indian economy.

The RBI publishes this data on their website, where it is free to access. It can be traced back as far as the 1950s. I have presented it in a new way to demonstrate the % contribution of each sector. As evident, Agriculture’s share has declined, while Services (predominantly software and associated services) has seen an upward trend.

Agriculture is still India’s largest employer, and this entire sector depends heavily on the type of rainfall each year. This reliance is not surprising since two-thirds of arable land in India requires rain for cultivation.

There are two main rainfalls seasons (monsoons) in India –

1.     The Southwest Monsoon (principal rainfall season), and
2. The Northeast Monsoon

I won’t go into the nuances of how these spells are brought about, that much I can’t tell you. Nonetheless, here’s what you need to know regarding both seasons –

1.     The south-west monsoon extends from the southern parts of India, covering all regions up to the centre of the subcontinent. This spell is likely to begin during June/July and last until September/October.
2. The Northeastern monsoon affects a vast area, from northeastern India and North India all the way to the Himalayas and western parts. It usually starts in early December and lasts till March. The majority of Tamil Nadu also falls within its region.

Every monsoon season, farmers sow seeds and harvest the crops. The quality of the yield depends on how plentiful or scanty rainfall is.

o   Crops planted during the south-west monsoon season are known as Kharif crops, also referred to as monsoon crops. These generally include pulses, millets, rice, urad dal, moong dal, cotton and more. Kharif crop planting typically begins at end of May or the start of June before the monsoon arrives. Harvesting then takes place after the rains have finished in October.

o   The Rabi Crop is sown during the Northeast Monsoons and is also known as the winter crops. Varieties such as wheat, gram, coriander, mustard and oats are common place. Sowing begins at the onset of winter and harvest takes place near the end of April.

Rice and Wheat are the staples of India, accounting for approximately 40% of its food grain production, thus playing an essential role in securing India’s food supply. Harvesting Rice during the Karif season and Wheat during the Rabi season are common practices.

The progress of sowing and harvesting is continuously tracked and broadcasted in major news outlets. Let’s take a peek at this –

This one reports the progress of Rabi crops –

The idea is to ensure we grasp what is being talked about here and relate it to the news article. As an ardent agricultural trader, you should routinely monitor such reports and segments for strategizing your trades.

The following agri commodities are available to trade on MCX –

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

Of all these agri commodities, I’d recommend you trade Cardamom and Mentha Oil, simply because of the liquidity reasons.

Let’s discuss these two commodities. Also, note that agri commodities  (especially the Indian agri commodities) are traded till 5:00 PM.

– Cardamom

India is the second-largest producer and biggest consumer of cardamom, while Guatemala tops the global production list. The small cardamom variety primarily cultivated in Karnataka and Kerala is mainly consumed domestically; however, Guatemala produces its version mostly for export.

Cardamom is a commonly used spice in Indian sweets, but it also has therapeutic benefits like skin and dental care. Indeed, indulging in something sweet can also be therapeutic!

Cardamom is a Kharif crop; the demand-supply dynamics mainly depends on –

1.     The southwest monsoons
2.     The quality – flavour, colour, size, and aroma of the harvest
3.     Production parameters – like inset attack on plantation
4.     Stock available at both India and Guatemala
5. Domestic consumption patterns (although this is quite steady over the years)

Let’s examine the contract details for Cardamom, as it differs from other commodities listed on MCX: unlike the others, there is no division into two variants—Cardamom and Cardamom mini.

The contact specs for Cardamom are as below –

o   Price Quote – Per kilogram

o   Lot size – 100 kgs

o   Tick size – Rs. 0.10

o   P&L per tick – Rs. 10/-

o   Expiry – 15th of every month

o   Delivery units – 100 Kgs

Here is the snap quote of the Cardamom expiring in Feb 2017 –

The price, as seen here, is Rs. 1,564 per Kg. Therefore the contract value would be –

Lot size * price

= 100 * 1564

= Rs. 156,400/-

The NRML margin is as shown below –

As you can see, the NRML (for overnight positions) margin is Rs. 16,237/-. This makes it about 10.5% margin for NRML orders.

You may have noticed that there is no MIS margin available for Cardamom, or any other agri commodities. This is because agricultural products tend to be quite volatile and often hit the circuit limit. As such, closing trades at the end of the day would be difficult. We would then suggest trading NRML intraday for better results.

Here is the contract introduction table of Cardamom –

It is clear that each month, a futures contract for the next six months is introduced. For instance, June futures are offered in January. These will remain active until the 15th of June, which is when all contracts expire monthly. To ensure the best liquidity, it is often more practical to trade with the current month’s contract.

– Mentha Oil

Mentha is an aromatic herb which is utilised in its raw form for Indian cuisine. It can also be distilled and filtered to form Mentha oil, which is then traded on MCX. This oil has manifold applications such as for use in the food, pharmaceutical, perfumery, and flavouring industry.

Mentha oil is imported to a few countries, including the US, China, and Singapore. This implies that Mentha Oil contract is sensitive to changes in USD-INR rate. Additionally, aspects like rainfall intensity, insect attack, and crop area also affect the contract.

The contact specs for Mentha Oil are as below –

o   Price Quote – Per kilogram

o   Lot size – 360 kgs

o   Tick size – Rs. 0.10

o   P&L per tick – Rs. 36/-

o   Expiry – Last day

o   Delivery units – 360 Kgs

Of all the things listed in India, probably Mentha Oil is the only asset which has Rs.36/- P&L per tick. 

Here is the snap quote of the Mentha Oil, expiring 2017 –

The price, as seen here, is Rs. 1,023.2 per Kg. Therefore the contract value would be –

Lot size * price

= 360 * 1023.2

= Rs. 368,352/-

The NRML margin is as shown below- 

It is clear that the NRML margin for overnight positions is Rs. 29,893/-, representing 8.5%. In accordance with the earlier-mentioned reasons, no MIS margin exists for Mentha Oil either.

Every month, contracts are introduced 5 months in advance. It’s best to stick with the present month contract for trading.