Spiced it Up!

Turmeric is on a roll. Prices of the yellow spice are up a whopping 64% this year. That’s about thrice the rise of the Sensex. India is the largest producer, consumer and exporter of turmeric, so I am sure a few people in India must be very happy these days. But the bulk of the masses are not since the party is not just limited to turmeric (aka haldi). Prices of most spices are spiralling upwards. Cardamom, pepper, cloves, mace, nutmeg and all sorts of things are becoming dearer by the day. This article here talks about the awesome climb of turmeric and other things. And that left me thinking about what type of people invest in commodities and how do they do it and is there some opportunity here for people like me to dabble in condiments.

Most online brokerages offer commodity trading and one can take positions in the spot or the futures markets. That’s all I know and I guess I have no desire to know more. These are highly cycical things and difficult to understand. I guess the only commodity that I have direct exposure to is Gold in the form of units of an exchange traded fund. All rest are beyond my comprehension. The ban on commodity trading in India was lifted in 2003 and volumes have certainly risen along with the advent of institutions like MCX, NCDEX etc. Speculators, industry houses must be trading a lot for both hedging as well as speculation. Thankfully there is not much retail money being put there. Since commodities are much more volatile than stocks. That characteristic should be an ideal breeding ground for the day trading gangs hoping to make some alpha given the high beta. However, given the predominantly agrarian nature of the country’s economy, I would guess that commodity trading should be quite popular here. It was a pretty short-sighted decision on the part of the Government to have banned commodity trading in the wake of the serial droughts that had hit the country during the 50s and 60s limiting the farmers’ ability to honour the various forward contracts that they had taken positions in. So whats happening now that while commodity prices are zooming up due to inadequate supply lines, the action is restricted in the hands of few. And that must be fostering mindless speculation with the action centered around a very small clique. Reportedly, the average daily turnover by value of spices futures on the National Commodity Exchange has doubled from a year earlier. Since the market lacks depth, only a handful of players hold sway. Definitely not a situation for retail rats like us to be found dead in.

My father and his ancestors used to grow cotton on their fields. I stay away from the black alluvial ancestoral soil of mine, but trading in cotton and making a few bales of money in the bargain might just emotionally connect me to my roots. So what do I do? Where do I go? Some quarters advise the advent of commodity based mutual funds as a good avenue for retail investors to build exposure to commodities. That advise certainly does not work for me. These mutual funds do not take positions directly in the underlying commodities. They buy stocks of companies that are long commodities by the virtue of their area of operations. That’ s proxy investing and a bit of misrepresentation by the asset management companies if one goes by the names of such mutual funds. At least the Mirae Asset Management company’s fund in this regard is more modest by including the word ‘stock’ in its name:  “Mirae Asset Global Commodity Stock Fund – Regular Plan (G)”. And then there is constant drone from the commodity perma bull and India basher, hitchhiker and biker Jim Rogers who keeps telling us how commodities as an asset class has a looooong way to go – up, is what presume he means.

I guess we need to wait for some time for Indian banks & mutual funds to be given the green signal to start trading in commodity futures. The Forwards Contracts (Regulation) Amendment Bill is pending approval in the Parliament and once that happens, not just commodity futures but even exotics like weather indices and derivatives off them will start trading. The logic for people long agriculture to trade in weather deivatives is compelling enough. But it still comes back to the point regarding competency. Even if a (fairly liquid) avenue gets created and is readily available in the hands of retail investors like me (no hassles, slightly higher commission online brokerages), I guess I’d still stay away since I don’t think I will be able to understand what moves such markets in this lifetime of mine.

During an exit interview of a past colleague of mine, it was revealed that he had put down his papers to pursue his dream of trading in the commodity markets. I know not of what has happened to him. Hope he is fine and is profiting from his love for cloves.