Guar Seed and Guar Gum Fundamental Report

Sakshi Mittal Economist Knowledge Management Group [email protected] + 91 22 66406568

Guar Seed And Guar Gum: A Fundamental Report

Guar seed is a crop that dominates the international business with Indian ascendancy in Guar Gum. Guar a versatile crop with industrial uses and export potential has transformed economic status of a number of farmers in India. As the guar gum, a derivative of the guar seed has found a great potential in the manufacturing sector, the demand for the guar gum and guar seed has grown manifold, providing farmers an incentive to increase the production of guar seed. About 9 lakh families in Rajasthan and other states like Haryana, Gujarat and Punjab depend on guar cultivation, according to as per the Commerce Ministry estimates in 2006. Guar seed has now become a cash crop due to more than 150 guar gum industries operating in India to consume any amount of guar seeds produced. Multiple uses and benefits arising from guar bean acted as strong incentive for smallholder farmers to be interested in growing these seed.

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Introduction Guar or cluster bean (cyamposis tetragonoloba) is a drought tolerant annual legume crop, mainly cultivated in the northern parts of India as a kharif  crop. This seed has a sphericalshaped endosperm containing galactomannan gum, which forms a viscous gel in cold water. Guar legume plant is an agricultural product grown in arid zones of west and North West India and parts of Pakistan. Guar seed is one of the few crops that can be produced in the desert areas.

Guar Seed: Uses Guar seed is mainly used for human consumption, cattle feed, medicinal purposes and also for soil improvement. The immature pods are dried and fried as chips, and the green pods are also cooked for human consumption. Plants are fed as green forage for cattle and the beans are also boiled and fed to cattle, which is a good source of protein. Guar seed plants also have medicinal importance—the leaves are eaten to cure night blindness, used as a chemotherapeutic agent against smallpox,

poultices for plague, cattle bellies, enlarged enlarged

livers, head swellings, bone swellings, etc., since it is a legume, commonly used as cover crop and green manure.

But in the modern times, approximately 90% of total Guar seed produced is used for production of Guar Gum and rest is used for culinary purposes and cattle feed, etc, because commercial interest in guar seed revolves around the endosperm of the seed which is ground to produce a powered gum used in a wide variety of products. The most important industrial use of Guar Seed is in the form of Guar Gum. Manufacturing of gum from its beans gives such astonishing results that it is considered `white gold’.

Guar seed consists mainly of three parts: germ, endosperm and husk. Guar gum is a very important product of guar seed processing. Guar gum recovery normally comes around 31% of total guar seed processed, whereas Churi and Korma account for 29% and 37% respectively. Split/gum is further refined to guar powder, churi and korma are used as cattle feed.

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Table 1: Guar seed Extract

Korma

37%

Churi

30%

Split/Gum Other

29% 4%

Source: APEDA

Major Producers

The major world suppliers o

guar seed are India, Pakistan and Unit d States, with

production mainly concentrate

in the Southern Asian continent as the cli ate there suits

well for the cultivation of this rop especially, in the Indian sub continent. T he agro-climatic conditions in Australia are also quite conducive to the cultivation of guar. E forts have been also made to promote cultivati on of guar in Australia by the Department of  Agriculture and Rural Industrial Development

gency. Similarly it is reported that countries like China and

Thailand are also trying to gro

guar. It is also grown in some African cou tries. However,

the production is not on a larg

scale. The climatic conditions in India are w ll-suited for the

crop to grow properly. India c ontributes to about 80% to the world guar

roduction; with

Pakistan contributing to about 15% total world production, while other countries just having a negligible share in the total global production (Figure 1).

Figure 1: Country Wise Guar Production

Source: CMIE

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Geographic Distribution

In India the production of guar seed is mainly concentrated in the arid region of Rajasthan, Gujarat, Haryana and some part of Punjab.

Rajasthan is a leading producer of guar

accounting for about 75% of total production in India. Haryana and Gujarat place themselves at the second and third positions regarding the production in India with 12% and 11% respectively.

In Rajasthan, the districts where guar is produced are Churu, Bikaner, Jaisalmer, Barmer, Nagaur, Hanuman Garh, Jodhpur, Ganganagar, Jaipur, Sirohi, Dausa, Jhunjhunu and Sikar. The districts in Haryana indulged in the production of guar are Bhiwani, Gurgaon, Mahendragrh and Rewari and the districts in Gujarat are Kutch, Banaskantha, Mehsana, Sabarkantha, and Vadodara and Ahmedabad.

But now the share of the other states has also grown due the irrigation facilities. In recent years the ratio of guar seed production under the irrigated land against the ratio of  production dependent on rainfall, has also grown in Haryana and Gujarat as farmers have also started cultivating guar seed partially in irrigated land. In recent years output shares in Haryana and Punjab has marginally increased as farmers are growing guar seed under irrigated sources of these states. Also in some parts of country like Ganganagar in Rajasthan, guar seed is cultivated under irrigated sources.

Different varieties of guar seed developed by the Central Arid Zone Research Institute, Jodhpur had given an edge to the farmers of Haryana. In Haryana alone the production of  guar seed has increased four folds since 1991 to 2008. The production of guar seed in Haryana has increased from less than one lakh tonnes during 1991-92 to more than three lakh tonnes in 2007-08. Research carried out by the Regional Agriculture Research Station, Triupati of Acharya N.G. Ranga Agricultural University shows that Guar can be more productive in light soils under low and uncertain rainfall situations in Andhra Pradesh.

Two crops of guar crop can be grown in a year provided irrigation facilities are present. But since nearly 60% of Indian farmland is without irrigation facilities, guar production is

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primarily dependent on monsoon rain, with the south west monsoon rain playing a crucial role. Agronomic suitability

Guar grows best in sandy soils and it needs moderate, intermittent rainfall with lots of  sunshine. Guar is a rain fed monsoon crop, which requires 8 ‐15 inch of rain in 3 ‐4 spell. For effective guar cultivation, the crop needs two rainfalls before sowing, one rainfall when the crop buds out and another when the crop comes up well and blossoming starts. Then it requires plenty of sunshine and dry weather to come up really well. During harvesting period it again needs good sunshine in order to dry up and become usable for industries. Guar is generally sown after the monsoon rainfall in the second half of July to early August and is harvested in October - November. The crop requires 3-4 spells of rain during seed setting and maturing, which is during September first week and the end of September. Normal rainfall results into good guar seed production. Guar seed production reached record high levels in 2004 and 2008 as rainfall in the southwest monsoon acted as an advantage to the guar crop prospects. Better-than-normal rainfall attracted farmers to increase area under guar seed cultivation. As a result, area sown in Rajasthan—largest producing state in India—rose to 1163.2 thousand tones and 1243.73 thousand tones, respectively in 2004 and 2008, respectively. Total production of guar seed in India reach ed record high of 1513.4 thousand tones in 2003-2004 and 1788.3 thousand tones in 2007-2008 due to increased acreage and good rainfall.

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Figure 2: Total production of Guar Seed ‘000 tonnes 4000 3500 3000 2500 2000 1500 1000 500 0        9        7          n       a        J

       1        8          n       a        J

       3        8          n       a        J

       5        8          n       a        J

       7        8          n       a        J

       9        8          n       a        J

       1        9          n       a        J

       3        9          n       a        J

       5        9          n       a        J

       7        9          n       a        J

       9        9          n       a        J

       1        0          n       a        J

       3        0          n       a        J

       5        0          n       a        J

       7        0          n       a        J

       9        0          n       a        J

Source: CMIE

Since it’s a rain fed crop, its yields are highly susceptible to the amount of rainfall it receives during the monsoon. The acreage fluctuation is very high both under good and bad monsoon conditions. The lower the rainfall, the lower the yields would be in the particular crop year. In 2009 the guar production declined by 27.31% to 13 lakh tonnes due to unfavorable rainfall. India received scanty rainfall which acted as a serious draw back to the guar crop prospects. India’s monsoon season in 2009 was the worst that India has experienced since 1972. Monsoon rainfall in the Sri Ganganagar district (Rajasthan), which includes Gharsana, dropped by 27% from its average, according to the Indian Meteorological Department, not very different from the 23% drop across India. The yield levels of guar seed crops declined sharply as the rainfall was insufficient at critical growth stages. This resulted in sharp decline in the production levels in the year 2009. Also much precipitation can cause the plants to become leafier, thereby reducing the number of pods and the number of seeds per pod which affects the size and yield of the seeds. For eg: year 2002-2003 was marked by a low production to the tune of mere 199.2 lakh hectares as compared to 1089.9 lakh hectare, due to excess rainfall. Due to the high dependence on monsoon guar seed supply is highly erratic. Thus, production fl uctuates from 2 lakh tonnes to 15 lakh tonnes annually varying with the level and intensity of monsoon rainfall in the major producing areas.

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Figure 3: G ar seed Production, Yield and Acreage

Source: CMIE

Value Chain Guar seed has shelf life of mo e than 3 years without losing out on any of  its properties or qualities. Hence, guar seed can be stored for long time (up to 5-6 years) . It requires the barest minimum maintenance and handling environment. The physical market of the commodity involves speculator and stockists. The commodity is subjected to a long storage period based on demand and market prices. The arrivals of Guar seed st rts from end of  September in major markets ( after Diwali festival) and extends for one month. Arrivals in Ganganagar of Rajasthan, Har ana and Punjab starts by the end of Septe

ber, since Guar

seed is cultivated under irrigation and harvested early. Arrivals in southern nd central parts of Rajasthan begin from end of October. Peak arrivals can be seen duri ng October and extend till the middle of November.

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Traders and stockists normally purchase guar seed during the peak arrivals and store for longer period to get better price. Millers are active buyers during arrival period for processing as the export demand begins during January - February.

Value Chain Of Guar seed Product

Farmer

Trader (mandi)/stockiest

Processing Unit (millers/split/powder)

Industries (export/domestic)

Guar Gum

Guar gum is the primary marketable product of the guar seed, as Guar seed is primarily exported in the form of guar gum. India is the world’s second largest manufacturer of  processed food next to China, and has the potential of being the biggest with the food and agricultural sector. The food processing industry is one of the largest industries in India-it is ranked fifth in terms of production, consumption, export and expected growth. And among the other processed foods category in India, guar gum captures the largest share at around 22%.

The guar gum, also called guaran, is extracted from the seed of the leguminous

shrub Cyamopsis tetragonolobus (Leguminosae). It is termed as the best substitute for locust bean gums. Jodhpur is the country’s leading centre of the guar gum manufacturing industry.

The status of largest producer of guar seed has helped India emerge as a prevalent exporter of guar and its derivative. Though guar gum constitutes the major proportion of the exports there has been significant variation in the value of exports of various products of guar for the period from 2005-06 to 2007-08. Another by-product korma and churi are both used in

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cattle and poultry feed. And th e demand for thes products have seen an increase following high prices of alternate cattle eed like soya meal. Since the prices of churi and korma are lower than that of soya meal, t hese products have emerged as favorite subs titutes. But guar gum still holds the largest share because of its special properties.

Guar gum treated and pulveri ed is the major by-product that is exported by India with a share of about 71.7% in total exports of the guar complex. Guar gum re ined split is the other major composition of exp orts with a share of about 26% in total guar complex exports (Figure 4).

Figure 4: Percenta ge share of Guar Seed Derivatives In Ex orts

Source: Source : Rajasthan Krishi [government of Rajasthan

Industry Issues The exports of the guar splits h as created some concerns in the minds of th exporters of  the guar gum as a result of whiich in January 2011, in a meet at Kolkata the exporters of  guar told the Director General f Foreign Trade, Ministry of Commerce & Ind ustry, that the guar gum exporters are affecte d by the export of guar gum split which i s a raw material for guar gum powder. The reason or the same is being attributed to the fact th t the Vishesh Krishi Gram Upaj Yojana (VKG Y) benefit being extended to guar gum splits and the benefit

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is being passed on to the importers/buyers. Under the VKGUY scheme duty scrip benefits are given to exporters to compensate them for high transport costs. Exporters of notified products are entitled for duty credit scrip equivalent to 5.00% of the FOB val ue of exports. In addition the duty credit may be used to import of inputs or capital goods as long as they are freely importable under the ITC (HS). The benefit available to exporters guar gum split (which is an input for guar gum) is not available to guar gum producers thus putting them at a disadvantage vis-à-vis competitors abroad.

The disadvantage is caused by the fact that this preferential treatment to guar gum split exporters has led to a boom in the guar gum industry in the competing countries despite the fact that India produces nearly 75% of the world’s output. More so in countries like China guar gum is processed and exported in powder form to other parts of the world thus affecting India’s exports. China’s custom tariff on Indian Guar Gum powder is 15% and on guar splits is 5%. Thus, China’s policy is to encourage import of raw material (guar splits) from India and process it in their own processing industries and re-export it, rather than importing finished products. While import tariff on guar gum imported from Pakistan is nil according to the Commerce Ministry report, thus, there is clear discrimination between India and Pakistan.

Guar Gum Uses

Guar gum remained a relatively obscure until its first industrial trial as an additive in paper making. Guar gum was not known for its industrial application till in the times of World War II, when there was shortage of locust bean crop and the paper and textile industry of the world was searching for a substitute. They found as efficient alternative in the form of guar gum and since then, this derivative of guar ruled over the locust bean and it was readily accepted for application in many other industries.

Guar gum was first introduced to the petroleum industry in the early 1960, as a drilling fluid additive because of its friction reducing and rheological properties.

It later became a

primary component of water based fracturing fl uids in which guar and its derivatives provide cost effective performance. The most significant use of guar and its derivatives has been in petroleum production, specifically in the area of hydraulic fracturing. Hydraulic fracturing makes it possible to produce oil and natural gas in places where conventional technologies are ineffective. It uses water pressure, under tight controls, to create fractures in rock that

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allow the oil and natural gas it contains to escape and flow out of a well. The success of that introduction and an increasing demand has naturally attracted followers with new uses for guar being continuously discovered since then.

As a result in more modern times, guar gum is used as an industrial application in mining, petroleum drilling and textile manufacturing. Now it is used in both industrial and food capacities. • Food Processing : Many foods utilize guar as a special additive to improve handling, smoothness, shelf life and other characteristics. Pet feed improved by the use of guar gum in its formulation • Bakery Industry: It is used in bakery industry, in bread, pastry, cakes, and cookies. On dry mixing prior to making bread it helps to retain moisture and the weight of bread. It keeps the bread smooth pliable and fresh for longer time and imparts milky white bleached appearance to bread. • Drug Industry: Guar gum, drug and other ingredients are mixed and compressed into tablets. During dissolution studies, guar gum hydrates and forms a thick gel layer on the tablet surface. • Health: Guar gum decreases the cholesterol and triglyceride levels but guar gum or other water-soluble, fermentable fibers increased the odd for colorectal cancer i n a study of rats. • Dressing and sauces: Improves the stability and appearance of salad barbecue sauces, relishes, ketchups and others (especially highly acidic emulsions) • Industrial uses: Guar Gum is used as a thickener and emulsifier in commercial food processing. It is also used in paper manufacturing, textiles, printing, cosmetics and pharmaceuticals. Guar is an all-natural ingredient, unlike other common thickeners such as modified food starch and cellulose gum and has been shown to provide important health benefits • Explosive: Guar gum is used in the explosive industry because of its ability to efficiently thicken the nitrate salt solution which is basic component of slurry explosive formulations. The gums are readily cross-linked to from stable water-resistant gels • Paper Industry: Guar gum is used as a wet-end additive. It gives denser surface to the paper used for printing. It is also useful in foresheet formation, Mullen bursting strength, fold strength, tensile strength, measure of the force required, to pull a fiber from the

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surface of sheet, machine speed that all parameters are increased and porosity of the paper is decrease • Mining: Guar gum is used in mining potash, gold, copper and platinum group metals as a flocculent and as a depressant. Reliance industries manufacturers a range of modified guar gum products tailor-made for the mining industry • Oil, Gas & Well drilling: Guar gum and guar gum derivates are used in the fracturing of  oil, gas and water wells. The guar gum is used to carry a river of sand and pumped into the ground at high pressure. This fractures the ground and then fills the fractures with sand, thereby making the ground more permeable and thereby increasing the recovery of oil, gas, or water in the existing well • Cosmetics: Guar is used in ointments, lotions, hair shampoos, hair conditioners ,thickening agent, lubricating agent, suspending agent, detergent compatible thickener, protective colloid, film forming agent, use in tooth paste, shaving cream etc. • Textile: Guar gum and guar gum derivates are used in to major textile applications as a printing thickener and as a binder in the sizing of yarns, particularly for denim sizing. In the textile printing industry, guar gum is used as a printing thickener to keep the dyestuff from spreading on the fabric (add photo of rotary printing machine). • Fish Farming: Guar gum is used as a binder in the fish feed pellets. The binder keeps the pellets from disintegrating quickly when placed in water and greatly reduce the consumption of fish feed in the pond. • Miscellaneous uses: Guar Gum powder is also widely used in other products such as photography, water treatment, fire fighting, incense stick, mosquito mat, soups, snacks, puddings, noodles, jam, ceramics, synthetic resin, carpet painting, wall Paper, water based paints, battery electrolytes, printing inks, polishes.

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Figure

: Percentage Share Of Guar Gum Use

Source: APEDA

International Trade Though Pakistan trails India in the global trade of Guar, India, is currently he only supplier to the world market because o lower production in Pakistan, the second-largest producer of  guar seed, as its crop was de troyed due to floods. Even though guar is a lso cultivated in USA, Brazil and in some Afric n countries like South Africa, Malawi, Zaire and Sudan, but the quantity produced is too n gligible. Indeed, these countries are major i porters of guar and its derivatives, as they con sume more of guar gum than what is produc d.

India exports nearly 70% of  its produce to the oil producing countrie

including Gulf 

countries, US and European na tions. The oil exploration sector is a major d mand driver for guar gum, with the commodit

being extensively used for fracturing of oil wells across the

world. Since US has the larges t rotary drilling rig, US is the largest consum er and importer of guar gum. US alone constit te to around 70 thousand tonnes of guar and its derivatives demand. The number of drillin

activities in North America remains the highest in the world,

accounting for about 70% of t e total, followed by the Far East, Eastern E rope and South America. Not only has the hig her oil drilling activities increased the demand for the guar

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gum, but the improvements in horizontal drilling and hydraulic fracturing that has taken place due to the use of guar since 1960, has also led to the increase in drilling rigs, in turn also leading to higher demand for guar gum.

Germany and China account for about 24% of global consumption together. In China guar gum is used is used in the manufacturing and the oil drilling and food products industry. But large amount of guar gum is used in the Chinese oil drilling activities. Not only is China the second largest consumer of oil but also since oil was discovered in China in the 1980s, private oil wells mushroomed with many skirting the state-owned large oil wells. Therefore, China has also emerged as an important consumer of guar gum. In fact India’s importers list of guar gum includes of all the oil producing countries such as US, Europe, South Africa, Saudi Arabia, UAE, Iraq, Qatar and Kuwait etc. Apart from these countries China is the second largest importer of guar gum.

Therefore, the demand for the Indian guar gum is positively related to the oil drilling activities and indirectly linked to the crude oil prices. Strong trends toward higher crude oil prices stimulate companies’ capital budgets and future investments, driving exploration and production activities, which in turn leads to an increased demand for guar gum. Certainly global demand for guar gum has increased over the years, owing to a steep rise in demand in the recent times, on account of its increasing use in petroleum industry. Empirical evidence can be drawn from the year 2009, when the guar gum exports from India declined by 15.51% to 2,18,459.73 Mt as compared to 258567.55 Mt in 2009 following reduced demand from the US following the reduction in the oil drilling activities in the country. US oil and natural gas drilling in 2010 remained below 2008 levels, according to API’s 2010 Quarterly Well Completion Report: Fourth Quarter . In 2010, a total of 37,892 wells were

drilled, up 12% from 2009 but down almost 33% from 2008.

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Figure 6: Major Destinations Of Indian Guar Products

Source: APEDA

Apart from its use in oil drilli g activities the largest market for guar gu

is in the food

industry. Food grade guar gum accounts for about 30% of a total Indian gu r export. In the US guar gum is generally re ognized as safe with differing percentages are set for its allowable concentration in va ious food applications. In Europe, guar gu m has EU food additive code E412. Though the European Commi sion (EC) has tightened imports of guar

um from India

following the discovery of high dioxin levels- as reported by the Export Imp rt Bank of India the guar gum demand is exp cted to rise further in the oil drilling indus try. Additionally soaring crude oil prices have b oosted the exploration activities, which in tu n has increased the demand for guar gum. Oil directed rigs in global set up broke another record in March 2011, with more of them wor king in the US than at any time in the pre vious nearly 24 years. Moreover, in May 2011, US President Barack Obama took aim at Big Oil in May 2011, calling for an end to taxpayer ubsidies for the highly profitable industry w ile also offering petroleum firms new leases a d incentives to increase production. Obam

also offered a

carrot in the form of expanded oil leases in Alaska, the Gulf of Mexico and lsewhere. There

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are also plans to lease new areas in the Gulf of Mexico along with new incentives for industry to develop their unused leases both on and offshore. All of these are just pointing towards the positive future demand potential as the oil drilling activities hold the key for guar gum demand.

The use of gum in industry is likely to only increase in future as new applications and substantial market growth are expected. In fact, the US Food & Drug Administration department has approved guar as a replacement to fats in food. Guar is a cheaper substitute to Xanthan gum (pure culture ferment) or locust bean gum. The processed food industry in India is expected to grow at a rate of 10% during 2010-2015. The food processing industry is on a high as Indians continue to have a feast. The Confederation of  Indian Industry (CII) has estimated that the food processing sector has the potential of  attracting US$ 33 billion of investment in 10 years. Fuelled by what can be termed as a perfect ingredient for any industry – large disposable incomes - the food sector has been witnessing marked change in consumption patterns, especially in terms of food. Increasing incomes are always accompanied by a change in the food basket. And an increase in the processed food industry will lead to an increase in the demand for the guar gum. While in South Africa guar gum finds its major uses in gold mining.

India has registered its presence in a very big way in guar exports since 1956, after which pioneer manufacturer and exporters of Guar Gum from India (for example, Premcem Gums) was started in 1960, after guar was introduced to the petroleum industry for its friction by the US.. From data it can be seen that demand over the period has grown consistently (Figure 7 and 8).

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Figure 7: Exports of Guar Gum Refined Spilt

Source: DGFT

Figure 8: Exports Of Guar Gum

Source: DGFT

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Guar Seed and Guar Gum as Investment Assets The broad spectrum of end uses of guar gum, with the industries using guar gum, growing with each passing years, has led to the increase in the demand for the guar gum from the international markets, and making this commodity a good asset for investment.

Volumes in guar seed and guar gum futures had been rising continuously since August 2004 after the contract was launched in April 2004. Open interest went above one-lakh tonnes in guar gum futures within the second year of the trading, spread over several participants, which indicates genuine trading interest in the commodity. According to various reports the huge volumes were seen primarily because traders who were trading in the unorganized markets were now seen shifting to the organized markets, i.e. the commodity exchange.

Guar as a commodity was already being traded for large quantities in informal markets; a good portion of this was migrated to the formal markets on the Exchange platforms. But the unorganized markets had a lot of their own si de effects for both the farmers and the end users as there existed a huge value chain in these markets, which led traders shift to the organised markets. There were huge intra seasonal and inter seasonal price fluctuations, due to the lack of price discovery and risk management for the growers, manufacturers and exporters which made it difficult to predict the commodity price trend. The domestic growers had problem in convincing the buyers i.e. manufacturers and exporters about the price situation. As guar seed is a rain-fed crop uncertainty about the yield and production existed. And since the Guar seed has shelf life of more than 3 years without losing out on any of its properties or qualities stockists and traders played an important role in price fluctuations when the supply was short. Lack of price certainty also led to frequent defaults by Indian exporters because of the difference in the price realized overseas and prices prevailing domesticially. Therefore, futures traded on organized exchanges acted as one of  the major factors in removing the default risk.

Benefits of Organised platform of trading to farmers The farmer community has actually benefited on account of the better prices which were not available to them earlier in the absence of the existence of such transparent trading platforms for futures trading. The higher price realisation for the farmers has been achieved

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by shrinking the value chain in agriculture which according to a study by NABARD provides the farmer with not more than 1/3 rd of the final price being paid by the consumer. Therefore, while certain users who had held oligopolistic power earlier have been affected adversely by rising prices and it is reported that approximately four lakh farmers engaged in guar farming stand have benefited from the same phenomenon. From the table below, we can see the price that a farmer received for each quintal of guar seed.

Table 1: Guar seed price received by farmers

Guar seed price received by farmers ( Rs / quintal)

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY06

1st Qtr

1,675

1,983

1,297

823

840

1,217

1,082

1,491

2nd Qtr

1,981

2,173

1,267

821

1,575

847

1,625

1,515

3rd Qtr

2,330

1,901

998

698

1,434

978

1,669

1,558

4th Qtr

2,408

1,387

828

758

1,439

958

1,534

1,596

Note: the price has been derived by discounting 6% from the mandi price on the last day of  each quarter of the financial years. 6% has been arrived by aggregating 2% as agent  commission, 2.5% as Sales Tax and 1.5% as Mandi Tax. Source: NCDEX 

Introduction of futures trading in the guar seed complex not only helped the farmers but also acted as one of the extremely useful feature to guar manufacturers since they provide an excellent hedging mechanism and promote transparency within the trade (Table 1 and 2).

The better price realization of the farmer on account of the fair price discovery process brought about by futures trading in guar (launched in April 2004) has resulted in the narrowing of the gap between the realization of the exporter and the farmer. The price realized by the exporter was 37.5 % greater than the realization of the farmer in 2003-04, the price disparity has since reduced to 9.2 % by 2005-06. Clearly, farmers have stood to gain with the introduction of futures trading.

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Table 2: Narrowing of gap in realization between the exporter and the farmer Quantity

Value

Value (in

Exporter’s

Farmer

Realisation

(in MT)

(in Rs

Rs/MT)

realization

realization

of exporter

terms of 

(in Rs/

the value

MT)

crores)

over farmer (in %)

of Guar seed (in Rs/ MT) 2001-02

32,961.36

101.3

30,736.60

11,383.92

8,300

37.15

2002-03

41,337.02

180.5

43,668.48

16,173.51

14,070

14.95

2003-04

38,072.30

153.2

40,231.38

14,900.51

10,840

37.46

2004-05

49,801.43

221.7

44,508.72

16,484.71

14,080

17.08

2005-06 *

30,881.99

148.3

48,008.40

17,780.89

16,280

9.22

Source: DGFT  Note:* April- Dec 

NCDEX also announces spot prices for Guar seed relating to the designated delivery center and specified quality parameters through the process of polling a set of market participants representing different segments of the value chain such as traders, importers, exporters, processors, etc. The process of polling (through bootstrapping mechanism) is done to arrive at a representative, unbiased and clean ‘benchmark’ spot price for Guar seed. The security of data and randomness of polling process ensure transparency and correctness of prices.

One of the economic functions of a commodity exchange is price discovery and whether this function is being served or not can be seen by comparing the movement of the spot prices with the near month futures price and see if they move together and also if they converge on expiry. When we plot spot and near-month futures prices of guar seed and guar gum we see a good co-movement and convergence (Figures 9 and 10).

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Figure 9: Co-Movement of S pot And Near-Month Futures Prices Of G ar Seed

Source: NCDEX

Figure 10: Co-Movement of  Spot And Near-Month Futures Prices Of  uar Gum

Source: NCDEX

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Price Behavior

There are no Government ru les and regulations governing the producti on, distribution, marketing, exports or imports of the commodity therefore the market forc s determine the prices. Guar being export ori ented commodity its price behavior in do estic market is largely determined by the ove seas demand of guar products. And since th e guar products demand is largely dependent on the number of oil drilling rigs, the domesti guar prices are indirectly linked to the crude oil prices, as higher crude oil prices leads t o higher drilling activities, which in turn increases the expectations of higher demand for gu r gum and guar seed. There is quite a bit of c -movement between the crude oil prices and guar gum and guar seed can be seen from th following chart.

Figure 11: Co – Movement o f Guar seed, Guar Gum and Crude Oil Pri es

Source: NCDEX, EIA

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The first four months of the 2011 provides a good insight about the correlation between the crude prices and the guar gum and guar seed prices (Figure 11). Guar seed prices and guar gum prices has reached a record level breaching Rs. 3000 per quintal mark and Rs. 8000 per quintal mark respectively, in the beginning of the 2011, while the crude oil prices has touched a two year high level, breaching the $100 a barrel mark. Oil companies are responding to recently elevated oil prices. Many are in fact scrambling to find and produce more oil. Oil company giants are planning to spend nearly half-trillion dollars in 2011 to find and extract oil and natural gas in order to take the advantage of higher oil prices, according to a new survey by investment bank Barclays Capi tal.

Oil-directed rigs broke record in the second week of March 2011, with a number of them working in the US than at any time in the previous nearly 24 years. The oil rig count only broke 800 less than two months ago for the first time in 24 years.

The driver here is

continued high and still skyrocketing oil prices in the early 2011. In all, the higher oil drilling activities has led to the expectations of higher guar gum demand owing to an increase in the demand from the oil sectors, which drove the guar gum prices to a record high level. The guar gum prices and guar seed prices have escalated by 48.44% and 9.34%, respectively in the year till date. While the oil prices have edged up by 24.67% in the year till date.

According to the latest figures provided by Agriculture and Processed Food Products Export Development Authority (APEDA), so far India’s guar gum exports for the period AprilDecember 2010 surged 82% to 279,197 tonnes as compared to 153,404 tonnes recorded during the same period last year, as a result of which market participants are further anticipating an increase in the guar gum demand, leading to an constant uptrend in the guar seed and guar gum prices.

Price of any commodity is determined by the interaction of supply a nd demand. Market price is dependent upon both of these fundamental market forces. Apart from the demand factor, a huge fluctuation in domestic production of guar seed also affects the prices to a great extent. Though broadly on a long term basis the guar prices depend on the international demand scenario, the supply of the guar seed depends upon the monsoon season. Therefore, the production of the guar seed also plays a major role in the movement in the guar prices. Since guar seed is a rain fed crop the prices of guar fluctuate at times mainly due to volatility in its production which is heavily dependent upon monsoon. Rainfall and

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prices have a negative correla ion as production is largely dependent on t he rainfall given the guar crop is largely a rainf  d crop.

Figure 12: Correlation Be ween Guar Seed Production And Guar G m And Guar Seed Prices

Source: NCDEX, CMIE

In the medium term, guar see

and guar gum prices fluctuates mostly in th months of July

and August. As in July-August the sowing takes place. Higher sowing activities make the market’s bearish about the p ices; on the other hand if the sowing acti vities witness a decline, it turns bullish for the prices. And the sowing activities completel

depend on the

monsoon season. While after sowing, before the harvest periods if the

onsoon season

turns unfavorable before the

arvesting period than it leads to an anticip tion of reduced

output acting bullish for the

uar prices, while if the monsoon seasons turns favorable,

prices generally turns lower. Arrivals generally happen in the months of October and November, which once again leads to price volatility of the guar gum futures contracts. (Figure 13)

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Figure 13: Guar Seed Price Volatility

Source: NCDEX

With the demand for guar and its products increasing with each passing ye r, the supply of  guar seed has not increased at the same pace. The average production of  uar seed in the country is 10-11 lakh MT and fl uctuates largely from year-to-year based on ainfall pattern. If we glance through the begin ing of the 2011, one can notice that besides higher overseas demand, low carryover stock a lso led to the rise in the price of the guar see d and guar gum prices in the first four month

of 2011. The carryover stock of guar gum had reached a

record low level for the current year, which has trigger prices to shoot up further. For the year 2010/11 stock are expect ed to fall below 20 lac bags which lowest en ing stock in the entire decade. The stock are e xpected to decline to below 20 lac bags fro

34 lac bags in

2009/10 and as high as 65 lac bags in 2008/09.

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Table 4: Supply Demand Scenario

2004/0

2005/0

2006/0

2007/0

2008/0

2009/1

2010/11

5

6

7

8

9

0

E

Production

48

60

73

110

85

40

90

Carry In

75

63.96

44.88

40.7

70.7

65.7

24.7

Total

123

123.96

112.88

145.7

155.7

105.7

104.7

Exports

53.04

72.08

69.18

72

82

73

93

Local

6

7

8

8

8

8

8

63.96

44.88

40.7

70.7

65.7

24.7

19

supplies

Consumptio n Ending Stocks

Source: NB Research, APEDA

Therefore, the estimated production, carry forward stock and demand play the major role in the determination of the prices leading to huge volatility in its prices. The prices can sometime stay stable and then rise or fal l abruptly.

Outlook

Looking forward, or the year 2010-2011, the guar seed production is expected to remain good, as the India Meteorological Department has forecast a near-normal monsoon, well supported by even distribution of pre-monsoon showers in almost all states, which has enthused farmers to undertake more sowing. The Met department’s long range forecast for the 2011 south-west monsoon season (June to September) is that the rainfall for the country as a whole is most likely to be Normal (96-104% of Long Period Average (IPA)). There is very low probability for season rainfall to be deficient (below 90% of LPA) or excess (above 110% of LPA). Preliminary reports suggest a higher acreage area under the crop so far this year. Nevertheless, even if the monsoon remains normal in June, much would depend upon the overall rainfall in July, which is the plant's germination stage. According to the Rajasthan farm Department, Guar seed output in Rajasthan in the current season is estimated at 14.9 lakh tonnes. The forecasted Indian output this year is much higher than the 10 lakh tonnes of 2009-10 and 13 lakh tonnes in 2008-09.

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Table 5: Cluster bean scenario In Rajasthan

Year

AREA

Production

Productivity

(thousand

(thousand

(kg/ha)

ha)

tones)

2006-07

2809

658

234

2007-08

2910

1243

427

2008-09

3316

1261

380

2009-10

2581

201

230

2010-11

2952

1488

504

Average (2006-10)

2914

970

355

Average (2001-05)

12011

589

244

%

44.9

64.68

45.49

Increase/Decrease Over 2001-05

Source: Rajasthan Krishi [government of Rajasthan]

Lower production of Guar in the previous year has led higher demand of guar from stockists as they are going for additional stocking of the produce till the fresh arrivals in the month of  October and November.

Guar gum exports from India are expected to be quite good in the current year amid robust demand from oil producing countries, with the rise in crude oil prices. Meanwhile, lower supplies from Pakistan, the second largest guar producing country next only to India, will push up guar gum exports from the country. The export from Pakistan declined as the crop got destroyed due to floods last season. Nonetheless, even if the crude oil prices witnesses some downtrend, the guar gum exports are likely to remain strong, especially from US, if  there is an increase in its oil drilling activities The demand of guar gum from the US food processing industry is also seen strong. US Food & Drug Administration department has approved guar as a replacement to fats i n food. The commercialization of guar seed and its derivative has acted has expanded the exports basket of the Indian economy and farmer’s economy and role thereby augmenting to a source of foreign exchange earnings. Despite the importance of this crop the supply of guar

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seed still faces some constraints, as it is largely grown in rain fed areas with extremely low rainfall; therefore productivity is low and production entirely dependent on rainfall. More research on improving the yield of the guar crop is needed. Only one research station, namely Agricultural Research station, Bahawalpur in whole of the country is conducting research on guar since 1984. Since then, only three varieties i.e. 2/1, BR-90 and BR-99 have been developed for fodder purpose. The varieties for seed purpose don’t exist. Therefore, these is a dire need to strengthen the research on guar to develop such varieties which are not only higher yielder in terms of seed but also process the higher gum and protein contents. Guar producers need to be assured of good and reasonable prices of guar so that it acts as an incentive to increase its production by providing remunerative return to the guar producers.

References:

Directorate General of Foreign Trade (DGFT) Centre for Monitoring Indian Economy (CMIE) Agricultural & Processed Food Products Export Development Authority (APEDA) National Commodity Derivative Exchange (NCDEX) Business Line Export – Import Bank Of India Rajasthan Krishi [Government of Rajasthan] US Energy Information Administration (EIA)

Disclaimer:

This report has been prepared by the Knowledge Management Department of 

NCDEX Limited for the purpose of information dissemination. The news reported is from the stated sources and does not necessa rily reflect the views of NCDEX. The facts are reported  from publications and have not been checked for authenticity. NCDEX and its employees will  not be responsible for any decision taken by the reader based on this report and are advised  to take independent advise on the commodity(is) dealt in this report .

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