GUAR SEASONAL REPORT

Transcription

1 7 th June, 2011 GUAR SEASONAL REPORT HIGH LIGHTS: Monsoon Prospects Acreage Projections Production Estimates Trade Policies Seasonality Ratio Analysis After such a historic rise in prices of guar seed and gum, all the market participants are looking forward for where the market will head from here. Good progress of the monsoon and the expectations of rains to hit the major guar growing regions by first week of July. The projections about the increase in acreage of guar by 15 to 20 per cent might impact the market sentiments. China has imposed an import duty of 7% and 15% on guar splits and gum powder respectively from India. On contrary, there is no import duty for Pakistan. Technical recommendations for guar seed and guar gum: NCDEX STRATEGY RANGE TARGET STOP LOSS June 2011 Sell July 2011 Sell June/July 2011 Sell /

2 Review: Guar seed and guar gum futures touched their life time high Fig 1: Futures price movement (Nov 10- May 11) during the year The guar seed and gum prices have gained by around 54 per cent and 105 per cent respectively. The prices surged to the lifetime high as guar gum and seed touched Rs and Rs.3351 levels respectively during May The arrival season (November- December) of the commodity attracted more export orders across the spot markets. The recovery in the global economy Gum Seed Price Source: Bloomberg and KCTL Research after the slump during 2009 resulted in higher crude oil production. The guar gum which is mostly used in the crude oil extraction purposes resulted in the good export orders of the guar gum during the peak arrival season. The prices found cushion from the guar gum exports which rose substantially during the CY The crop damage in the major guar growing regions across Pakistan led to the shift in export demand to India. Thus the prices rose substantially during the Nov 10- May 11 period. The crude oil prices crossing the 100$ mark in the international markets during the March month due to Libyan political concern, boosted the demand for guar gum. The demand from the stockists and the millers also rose substantially during this period; on anticipation of the demand to continue in the long run. Though the fresh export demand was absent after the second half of March, the perception of the demand to increase still drove the prices to their life time highs. Some sharp corrections were also witnessed amidst this rally as and when the international agencies predicted the monsoon forecast in India. At a certain stage, the prices of the commodity sustained much above the actual value of the commodity which could have been driven by speculators. After such a historic rise in prices of guar seed and gum, all the market participants are looking forward for where the market will head from here. So this report carries KCTL S view for guar seed for the upcoming sowing season. Seasonality: The seasonality in agri commodities includes price seasonality and the crop seasonality as per their price movement and the cropping pattern over the years. Guar is a Kharif

3 crop in India which is generally sown during June-July months and harvested in November-December. The scenario is the same in Pakistan, the second largest producer of guar seed in the world. Figure 2: Price seasonality Guar seed in India Source: Bloomberg and KCTL Research CROP CALENDAR Correlation of guar production and rainfall Plantation Harvest Kharif being the sowing season for guar seed the major price influencing factor is the progress of the monsoon. The statistical relationship between the rainfall and the production is negative while the practical scenario is very different. The numerical analysis might not include the sentimental impact of the rainfall on the prices which occurs due to the traders perception about the rains. Along with the onset, the spatial and temporal distribution of the monsoon also has major impact on guar price movement. Thus the market dynamics plays an equal role in the guar price movement along with the fundamental factors. Production Rainfall Area Production 1 Rainfall Area

4 AREA: The acreage under guar seed during the current year is expected to increase by around 15-20% compared to the last year. The acreage might be slightly above 3 million hectares compared to 2.6 million hectares during last year. The returns fetched by the commodity during the last cropping year might result in wide spread of the acreage along with good monsoon prospects. The damage occurred in the cotton growing regions might also result in conversion to guar acreage as the cost of re sowing in cotton would be higher. The supportive weather condition for the monsoon to progress well across the southern peninsula currently has opened up brighter prospects of the monsoon across North Western regions of Rajasthan which might result in higher acreage. The sowing prospects across the Pakistan regions is also expected to progress well as the south west monsoon is also forecasted well across Pakistan. Thus during the current year a normal acreage under guar seed can be expected which might influence price movement in Indian markets. PRODUCTION Production of guar is expected to be marginally above (78-80 lakh bags) as compared to the average production which being 77 lakh bags per year. The rise in acreage by 15-20% might not have major impact on production, thus retaining production levels around the normal average in the last ten years. Some drastic changes in the production can only be attributed to the distribution of the rainfall. MONSOON PROSPECTS: The south west monsoon arrived at the Kerala coast two days ahead of the projected schedule. The current weather conditions are also supportive for the good progress of the monsoon. As on date the monsoon has reached the Mahratwada regions and the southern peninsula. Furthermore, the monsoon is expected to reach Rajasthan regions by 20 th of June and at the earliest. The rains might hit the major guar growing regions by first week of July. The rains are expected to be normal during the current season which could result in supporting the sowing prospects. The rain of mm is expected across the major guar producing regions which could help the crop growth. The adverse effect of the monsoon cannot be ruled out for the current year, as the international weather agencies are predicting good rains due to effect of La Niño conditions. TRADE POLICIES: Recently, china- second largest importer of guar from India has imposed an import duty of 7% and 15% on Indian guar splits and gum powder respectively. On contrary, there is no import duty on Pakistan. This implies the re shift of 20% of export demand which

5 came in last year from India to Pakistan which due to the crop damage in Pakistan during the last year. GUM-SEED RATIO In last 5 months average of ratio of guar gum to seed is The ratio has increased to 3.19 which is so far the highest in last 7 months. The movement of the ratio of gum to seed has been on its march towards north wards from the yearly average of 2.4 levels during the year The change in ratio is determined by the individual demand for gum and seed. This drastic increase in the ratio was a result of surge in prices of guar seed and gum which was driven by the export demand and speculative movement. Further, we are expecting the ratio to decrease in the short run and touch its normal levels as the demand is expected to gradually decline for guar seed across the spot markets. The rise in guar gum due to inflated demand is not likely to continue further. Thus prices would decline gradually leading the ratio to be at normal levels. OUTLOOK: YEAR MAX MIN AVERAGE * *Jan-May 11 The earlier on set of the monsoon at the Kerala coast is affecting the guar market sentiments even though it has no direct relevance. The supportive weather conditions for the progress of the monsoon are further expected to have a negative impact on the prices. The monsoon showers are ready to soak the southern peninsula in a fort night and reach the rajasthan regions by June 20 th. The upper air circulations are also suggesting the further good progress of the monsoon and the rains are expected to hit the major guar growing regions by first week of July. The prices are expected to feel pressure of rains and trade down side in the next 2-4 months. The projections about the increase in acreage of guar by 15 to 20 per cent might impact the market sentiments. The possibilities of the increase in acreage in guar seed is due to the sowing of the gaur in the crop damaged regions under cotton. The physical market participants liquidate their stocks across the spot markets which might pressurise the spot prices and have the same impact on the futures. The absence of the demand while the arrival from stock hit the spot markets might also result in down trend in the prices. The south west monsoon not only supporting the production but also the same effect can be seen on the guar growing regions across Pakistan. The crop is expected to be normal unlike the drastic damage during the last crop year due to floods. The export demand which shifted from Pakistan to India might not retain during the current crop year based on the good sowing and production prospects expected there also. China has imposed an

6 import duty of 7% and 15% on Indian guar splits and gum powder respectively. On contrary, there is no import duty on Pakistan. This preferential move as China is the second largest importer of gum in the world might affect the India s share of exports to China. This might further weaken the prices in India in the short run along with the expected higher acreage and the good production prospects. Later on the prices tend to rise gradually as the crop harvest starts off across the irrigated guar growing regions and the export consignments trickle in. Technical Analysis Guar seed prices are trading higher for the second consecutive month. Prices are witnessing resistance at 3409 levels (previous month s high). Only on breach and sustained trade above may escort the prices to further highs. However, technical are rendering a bearish approach on this commodity. Market is witnessing RSI Divergence along with price rise which is shown in the chart 1. This can also be called as a Negative Divergence and suggesting lower potential. If we look at chart2 prices are witnessing a rising Wedge formation on the weekly chart suggesting downside potential. Any weekly closing below 3200 levels would confirm the down trend. If we talk about the chart3 Gann theory suggest prices are likely to take correction on the lower side as prices are witnessing 1x2 line resistances which is degrees. On sustained trade below is likely to test 1x1 lines which are 45 degrees. In the chart4 the Moving Average principle suggesting a contraction as prices are witnessing a wide range between the short and medium term EMA s of (8,21&34 months). The principle of Fibonacci Projections state that prices are witnessing crucial resistance at 3420 levels which is 100% projections of the range levels. On sustained trade below may escort the prices to further lows. Looking at the above analysis and relating these to price seasonality we believe Guar seed prices to trade on lower in the coming months.

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