Basmati Rice Futures

Feasibility Study

Multi Commodity Exchange of India Ltd

102 A, Landmark, Suren Road, Chakala, Andheri (East), Mumbai - 400 093 Tel: 022 66494000 / 26836016, Fax: 022 66494151 Email - info@mcxindia.com www.mcxindia.com

Introduction

Basmati Rice, known as the King of Rice is the gift of India and Pakistan to the World. The foothills of the Himalayas provide the distinct natural conditions and the soil required for the cultivation of this scented rice. It is estimated that basmati rice has been cultivated in the subcontinent for the past 8000 years. Basmati rice is priced for its characteristic long-grain, subtle aroma and delicious taste. The grain elongates on cooking giving it a characteristic grain shape and integrity. Basmati rice is the leading aromatic fine quality rice of the world trade and it fetches good export price in the international markets. Infact, Basmati rice is a gift from "Mother Nature" to the Indian sub-continent and grows in the Indo-Gangatic plains only. The meaning of Basmati can be derived from "bas" which means aroma and "mati" meaning sense. Thus the word Basmati implies 'ingrained aroma'. So it is the aroma that gives basmati its novel characteristics unmatched by any other rice grain anywhere else in the world. Many scented varieties of rice have been cultivated in the Indian sub- continent from time immemorial but basmati distinguishes itself from all other aromatic rice due to its unique aromatic characteristics coupled with silky texture of its long grain. The supremacy of basmati rice can not superceded by any other scented variety because of its unique characteristics viz superfine kernels, exquisite aroma, sweet taste, silky texture, delicate curvature and linear kernel elongation with least breadth and swelling on cooking. Because of its quality characteristics, basmati rice is fetching higher price in the international market. Hence, basmati rice can be equated with "champagne" among wines and 'scotch' among whiskies. During pre-partition times, basmati rice was grown in India only but after partition, its heritage is shared between India and Pakistan. Presently, major growing states of basmati rice in India are Haryana, Punjab, Western U. P. and Uttranchal. Basmati rice being novel product is characterized by its unique grain size, aroma and cooking qualities. Being high value product, it has got good export demand. Hence, the export has been very high and exports have been steadily growing. The export of basmati rice during 1991-92 was 2.66 lakh mts, a quantum jump of 96.6% at 5.23 lakh mts in 1996-97. During the year 2000-01, basmati rice export touched an all time high record figure of 8.52 lakh mts (provisional) showing on increase of 62.9% over 1996-97. During 2001-02 basmati rice export was 6.66 lakh mts. (Provisional) showing downwards trend compared to previous year's export of 8.52 lakh mts (provisional), but the export of non-basmati rice registered an increase of 124.6% during 2001-02 over 2000-01.

Production
Basmati rice is grown exclusively in the northern part of Western Punjab (on both sides of the Indo-Pakistan border), Haryana and Western Uttar Pradesh. India is the largest producer and exporter of basmati rice in the world. The annual production in the country hovers at around 10-15 lakh tons a year, of which around two-thirds is exported. The remaining is consumed, within the country. The domestic consumption is increasing within the country too. The increased proliferation of branded players in the market has been the main reason for this trend.

Indian Basmati Varieties

Basmati 370 Basmati 217 Taraori (Karnal, Local, HBC-19) Haryana Basmati (HKR 228/IET 0367) Mahi Suganda Dehradun (Type 3) Basmati 386 Ranbir Basmati (IET 11348) Kasturi (IET 8580)

These are the traditional varieties of basmati, and are protected under the Geographical Appellation Act, 200. The crossbred varieties like the Pusa Basmati 1, do not qualify as traditional basmati varieties, in international trade.

Basmati Rice Cultivating Districts of India

Haryana accounts for around 50% of the area under basmati rice in India, followed by Uttar Pradesh with 25% and Punjab with 18%.

Basmati Rice Cultivating Districts of India

Haryana and Punjab Himachal Pradesh Rajasthan Uttar Pradesh Uttaranchal Jammu & Kashmir Karnal, Panipat, Kurukshetra, Kaithal, Amritsar, Fatehgar, Gurudaspur, Hoshiarpur, Jalandhar, Patial, Sangrur, Ropnagar Kangra, Solan, Una, Mandi, Sirmour, Bundi Saharanpur, Muzaffar nagar, Pilibhit, Bareily, Bijnour, Moradabad, Jyotibaphule Nagar Rampur, Raibereily, Sitapur, Udham Singh Nagar, Haridwar and Dehradoon In lesser quantities in some areas

The productivity of basmati paddy in India is around 1400-2100 kg a hectares against the yield of non-basmati paddy of 4500-5000 kg a hectare.

Exports
India annually exports around 6 lakh to 8 lakh tons of basmati rice. Basmati rice exports have increased from 2.32 lakh tons in 1990-91 to 6.66 lakh tons in 2001-02. Basmati exports from India peak during March-April period and the November-December period. Saudi Arabia is the largest importer of Indian basmati rice. European Union is the next important market for Indian basmati. The EU buys roughly around 1-1.5 lakh tons of basmati rice on an average.

Indias Basmati Rice Exports

Quantity in 000 tons Value in Rs. Crores 266.53 499.18 324.79 800.64 527.23 1,061.26 442.13 865.32 373.31 850.67 523.16 1,247.64 593.32 1,685.62 597.76 1876.91 638.38 1780.34 851.72 2165.99

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Gulf region remains the major markets for Indian basmati rice and inside Gulf, Saudi Arabia accounts for the major chunk of basmati imports from India. Pakistan is the sole competitor for India in the international market for basmati rice. During 1998-99, 19992000 and 2000-01, total quantities of basmati rice exports from India were 5.98 lakh tons, 6.38 lakh tons and 8.52 lakh tons in which the percentage share of Asia was 85.69%, 82.12% and 73.38% respectively. The percentage share of Asia has decreased for basmati rice, during 1998-99, 1999-2000 and 2000-01 but the export to Europe has increased in linear order from 11.41% in 1998-99 to 14.37% in 1999-2000 and 20.46% during 2000-01 respectively. The export to North America has also increased in the same order from 1.39% during 1998-99 to 5.28% during 2000-01. However the export to other countries remains constant with slight fluctuation from year to year. India's major markets for basmati rice exports have been Saudi Arabia, Australia, Austria, Belgium, Bahrain, France, Germany, U.K., Denmark, U.S.A., Canada, Belgium, Kuwait, Italy, Oman, Yemen, Netherlands, Jordan, Indonesia etc. Infact, Saudi Arabia traditionally has been the largest market for Indian basmati rice. There are over 100 varieties of aromatic rice, of which Basmati is the costliest. There are 11 varieties grown in India, of which 4-5 is exported all over the world. But they are area specific. In the Middle East, the parboiled rice is preferred, while in Europe; the brown Basmati rice is preferred. In the U.S., Canada, Australia, New Zealand, Japan and 30 other countries, the white Basmati rice is sought after. India is the worlds largest exporter of Basmati rice, selling about 6-7 lakh tons of the premium rice all over the world every year and has the potential to export 10 lakh tons of the rice. These exports are mostly to Saudi Arabia and other Middle East Countries, Europe, and the United States. Rice exporters in India have the most modern state-of-the-art technology and facilities. The packaging industry too has taken long strides and is among the best now. Indian exporters are also known for their better and aggressing marketing campaign, which includes quality of the products as well as services. There are about 50 brands of Basmati rice currently being exported from India. The growing trade also led to the setting up of the Basmati Development Fund (in 1995) whose responsibility include the promotion and protection of the Basmati rice.

Suitability for Futures Trading in Basmati Rice

The Basmati Rice market is a free market and it is not controlled or regulated. There is an efficient spot market for the commodity, in the major production centres. The major production centres as detailed above are also the major trading centres. Well-developed physical market coupled with presence of large number of market participants ranging from export house, corporate bodies, and traders to farmers already exists. Presence of various corporate such as ITC, Lal Quila, Hindustan Lever, Mahindra Subh Labh and different export house would provide vibrancy. The prices display significant fluctuation between different production seasons and also within a season. This exposes the traders and exporters to price risks as they usually enter into forward agreements with the importing nations. Several major corporates are also undertaking contract farming of basmati rice. A futures contract in basmati rice, would therefore be able to reduce the risk exposure of both the farmers and the corporates. Basmati rice grades and quality parameters are more clearly defined than rice quality parameters. This would also be very important for ensuring a successful futures contract in basmati rice. Well-developed physical market coupled with presence of large number of market participants ranging from export house, corporate bodies, and traders to farmers already exists. Presence of various corporate such as ITC, Lal Quila, Hindustan Lever, Mahindra Subh Labh and different export house would provide vibrancy. With the ease in structural bottlenecks future trading in rice is understood to take off. Monthly Price Volatility in Basmati Rice Prices at Ambala (1996-97 2001-02) Monthly % Volatility <2 2-5 5-8 8-12 >12 No. of times 23 18 14 7 6 % Occurrence 33.82353 26.47059 20.58824 10.29412 8.823529

Projected Turnover of Basmati Rice Futures in India

Presently, 10 lakh tons of Basmati Rice is produced in the country annually. It is assumed that 1. Production figures of Basmati Rice may remain constant over next five years for the sake of convenient calculation, and 2. Prices of Basmati Rice may increase by Rs. 120 per 100 kg, as the rate of inflation in the country is around 4-5%.

Projections of Production of Basmati Rice

200405 Annual Production (In lakh tons) Price (Rs./100 kg) Annual Production (in Rs. crore) 2650 2650 2770 2770 200506 200607 10 2890 2890 3010 3010 3130 3130 200708 200809

Conservative Multiplier Factor for Futures Trading in Basmati Rice

Scenarios Optimistic Most-likely Pessimistic 2004-05 0.6 0.5 0.18 (% of annual production) 2005-06 2006-07 2007-08 2008-09 0.9 0.7 0.4 2.1 1.7 0.8 3.3 3.0 1.8 3.4 3.1 2.5

In the developed markets, futures trading are normally 10 times that of the production of Rice. Assuming that 50% of the available quantity in respect of Basmati Rice may be dealt with in futures market and taking conservative multiplier factor the projected futures trading is as under:

Projections of Futures Trading of Basmati Rice

(In Rs. crore) Scenarios Optimistic Most-likely Pessimistic 2004-05 2005-06 2006-07 2007-08 2008-09 795 662.5 238.5 1246.5 969.5 554 3034.5 2456.5 1156 4966.5 4515 2709 5321 4851.5 3912.5

Contract Specifications of Indian White Basmati Polished Sortex Rice

Symbol Description Contract available for trading January Contract BASMATIRICE BASMATIRICEMMMYY 16th September of the earlier year to 15th January of the contract year February contract 16th October of the earlier year to 15th February of the contract year March Contract 16th November of the earlier year to 15th March of the contract year April contract May Contract June contract July Contract August contract September Contract October contract November Contract December contract Trading period Trading session 16th December to 15th April of the contract year 16th January to 15th May of the contract year 16th February to 15th June of the contract Year 16th March to 15th July of the contract year 16th April to 15th August of the contract year 16th May to 15th September of the contract year 16th June to 15th October of the contract year 16th July to 15th November of the contract year 16th August to 15th December of the contract year Mondays through Saturdays Monday to Friday: 1st session: 10.00 am to 5 .00 pm 2nd session: 5. 45 pm to 11.15 pm Saturday: 11.00 am to 2.00 pm Trading Trading unit Quotation/Base Value Maximum order size Tick size (minimum price movement) Daily price limits Initial margin 10 MT Rs./Quintal, Ex-warehouse Delhi inclusive of all taxes 200 MT Rs.1 6% 8%

Special Margin

In case of additional volatility, a special margin of 2 % or such other percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for next 3 days, after which the special margin will be relaxed. For individual clients: 1000 MT For a member collectively for all clients: 25 % of the open market position

Maximum Allowable Open Position

Delivery Delivery unit Delivery center(s) Quality Specification and Delivery Standards

10 MT with tolerance limit of 2 % Exchange approved warehouse at Delhi Indian White Basmati Polished Sortex Rice of current year crop with following standards Average length: Above 7.1 mm Broken: 2 % Max on the basis of 2/3 Foreign Matter: 0.5 % Max Whiteness : 38-40 KETT Paddy Grains: 5 grains per Kg Max Moisture: 14.0% Max Acceptable upto 14.5% with Discount on 1:2 basis above 14.5 % Rejectable Basmati Rice should be in 50 Kg new jute bag, machine stiched only. The weight of bags will be deducted out of total truck load, as per terms decided by the Exchange. The cost of bags, as determined by the Exchange will be payable seperately by the buyer to the seller.

Packaging

Annexures
Monthly Prices of Basmati Rice at Ambala in Rs./100 kg Month Price in Rs./100 Kg Oct-96 3500 Nov-96 3200 Dec-96 3000 Jan-97 3000 Feb-97 2800 Mar-97 3000 Apr-97 3050 May-97 3200 Jun-97 3200 Jul-97 3000 Aug-97 3150 Sep-97 3000 Oct-97 3000 Nov-97 3100 Dec-97 3200 Jan-98 3200 Feb-98 3200 Mar-98 3200 Apr-98 3400 May-98 3400 Jun-98 3600 Jul-98 3700 Aug-98 4000 Sep-98 4500 Oct-98 4500 Nov-98 4600 Dec-98 4000 Jan-99 4000 Feb-99 4100 Mar-99 4100 Apr-99 4200 May-99 4200 Jun-99 4200 Jul-99 4000 Aug-99 3900 Sep-99 3500 Oct-99 3700 Nov-99 3200 Dec-99 2400 Jan-00 2400 Feb-00 2700 Mar-00 3000 Apr-00 3000

May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02

3000 2950 3100 2900 2800 2800 2900 2900 2900 2900 2800 2900 3000 3000 3200 2900 2900 3025 3200 2600 2800 2600 2700 2900 2600 2900