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Weak response to Indian pepper's global venture

D Jose in Thiruvananthapuram

International and domestic response to the international pepper futures exchange, which began trading operations from November 17, has not been encouraging. While foreign traders are yet to make their presence felt on the exchange, even the reaction of domestic players has been lukewarm. However, the setting up of India's first international commodities exchange has been welcomed across the board.

After economic liberalisation in 1991, the need for an international exchange was felt. A domestic exchange, under the aegis of the Indian Pepper and Spice Trade Association, has been functioning successfully since January 15, 1957, and the government decided to upgrade this centre's trade in pepper to international level. This led to the international pepper futures exchange, known as the IPSTA-International Commodity Exchange (IPSTA-ICE). Said IPSTA President T Vidyasagar, "The international exchange will benefit all the global participants in black pepper through price discovery and risk transfer."

The decision to establish the international pepper futures market in Cochin was preceded by an indepth study, carried out by the United Nations Conference on Trade and Development at the request of the International Pepper Community. The International Pepper Community accepted the UNCTAD report and made its recommendations to the government of India. The central government in turn gave IPSTA the mandate to establish and operate the international exchange.

The region now comprising Kerala has been involved in the pepper trade since time immemorial. It was the quest for Indian spices, especially pepper, that saw many foreign ships drop anchor off the Malabar coast in Kerala. History has references to the flourishing trade between India and Arab traders, and via the Arabs, to the Roman Empire and later to Western Europe. The port town of Kozhikode was the nerve centre then of this flourishing international trade, which further grew after the landing of Vasco da Gama at Kappad, near Calicut, in 1498, followed by the Dutch, English and French traders.

While earlier, pepper and spices were traded freely, this was stopped in the post-colonial India. In the 1950s , the trade in pepper was controlled by a nucleus of European mercantile firms located in Fort Cochin. The European traders were, however, on their way out and soon the trade in the black gold passed into the hands of Indians. Subsequent development and modernisation of the ancient port of Cochin saw the pepper trade flourish in the following decades, but international trading was limited due to the socialistic pattern of economic development followed by New Delhi. This would change after economic reforms were ushered in.

Towards ensuring greater efficiency on the international exchange, IPSTA, which has 146 members and 32 brokers, has set up a fully computerised trading centre and an independent clearing house, the First Commodity Clearing Corporation of India. Unlike other clearing houses worldwide, FCCI will provide financial guarantee to the pepper futures contracts.

Vidyasagar said that all trades are registered and settled through the clearing house, which has appointed Global Trust Bank and IndusInd Bank as the clearing banks. Futures trading for 12 months will be possible in the exchange, thought the Forward Marketing Commission has permitted futures trading only for up to six months during the initial stages. At present, futures trading is now going on for the months of February, March, April and May.

The IPSTA president pointed out that the futures trading was the most effective mechanism for ensuring transparency in the trade and for protecting traders and farmers from massive price fluctuations. The exchange has allotted two hours for the participation of foreign players -- from 0930 to 1030 hours IST, and 1630 to 1730 hours IST.

Trading, though,has yet to pick up. The past two weeks has seen very low trading, with daily turnover below the Rs 1 million mark. The first two weeks of operations saw very few buyers. In fact, the first three days of trading, during which many expected an enthusiastic response, saw contracts booked for a paltry 125 quintals, valued at a measly Rs 2.52 million.

A source, however, attributes this to sellers' pressure and IPSTA officials are optimistic that foreign participation will pick up once trading stabilised. An IPSTA official said that many inquiries about the exchange have been pouring from foreigners and international traders. Exchange authorities are hoping that at least 25 new foreign members will join IPSTA-ICE, currently having 68 members, in the first year of its operations. Vidyasagar said IPSTA is planning a promotional campaign to attract foreign participants through road shows and workshops in major pepper producing countries like Indonesia, Malaysia, and Thailand. He added that IPSTA has also approached the Union commerce ministry for necessary help in this regard.

Some exporters claim that foreign participants are shying away from the exchange because of the condition that trade should be conducted only in Indian rupees. A Cochin-based exporter said that the foreign participants were apprehensive about the feasibility of converting their rupees to other currencies after investing in the trade. Therefore, exporters have suggested trading in terms of US dollars which might ensure greater international participation, the primary main objective of the exchange.

The global outlook for pepper production is bright this year. The International Pepper Community, which had its 25th session at Cochin in early October, has estimated the world production will go up from this year's 274,044 tonnes by 186,750 tonnes in 1998, leaving an exportable surplus of 152,546 tonnes.

India, with an annual production of 60,000 tonnes, is a leading producer of pepper, and nearly 60 per cent of Indian pepper is exported. Indonesia, Malaysia, and Brazil, producing 45,000 tonnes, 23,000 tonnes and 20,000 tonnes respectively, are the other major pepper producers. At present, world trade in pepper stands at 150,000 tonnes per annum, and is expected to grow. India's pepper export touched a record level of 47,000 tonnes in 1996-97.