COMMODITY: Mentha Oil Price Review..!

COMMODITY UNDER FOCUS Mentha Oil..

Mentha is an aromatic herb, Mwhich also goes by the name Shivalik in India. Steam distillation and filtration of dried Mentha arvensis leaves produces mentha oil, which can be processed to yield menthol and other derivatives.

Mentha oil and its derivatives are extensively used in food, pharmaceutical, perfumery, and flavouring industry. India is the largest producer and exporter of mentha oil and its derivatives. The other major producers are China, Brazil, the U.S. and Japan.

During the last five years, India has exported nearly 15,000 tonnes to 20,000 tonnes of mentha oil and its derivatives each year (Chart 1 & Chart 2).

Indian Scenario..!
Mentha arvensis in India is cultivated in semi-temperate regions of the Himalayan foothills—Uttar Pradesh, Himachal Pradesh, Punjab, and Bihar. While India produces about 80% of world’s mentha oil, Uttar Pradesh alone contributes about 90% of India’s total production.

Sowing of mentha plants begin in December. While harvesting of leaves is done up to thrice in a season, oil arrivals begin by June. Major mentha oil markets in Uttar Pradesh are Moradabad, Rampur, Bareilly, Badaun, Baranbanki, Chandausi and Sambhal. Mentha oil production in India has been rising since 2004.

And since then, there has been a transformational shift with India moving up the value chain from just being an exporter of mentha oil to exporter of crystals. The shift to crystal manufacturing actually occurred from 2005 when MCX introduced the mentha oil futures contract.

Price risk management

Mentha oil prices have always been quite volatile, with annualized volatility in spot prices hovering around 20% to 30%.

In 2014, the annualized price volatility was about 23%. This means a mentha oil trader with an annual turnover of  Rs. 10 crore was exposed to a price risk of about Rs. 2.3 crore in 2014.

Overall, India with an estimated mentha oil market of Rs. 3,000 crore, is exposed to volatility risk of `690 crore (that is, 23% of the holding value).

Hence, adoption of a risk management practice, such as hedging on MCX, can shield against the perils of price volatility.

Uniqueness of mentha oil spot price polling..

Mentha oil futures traded on MCX is deliverable at Chandausi with Barabanki as an additional delivery centre—both the towns are in Uttar Pradesh.

As the annual crop size of mentha is small as compared with many other agricultural commodities, MCX, as a precaution, has created an index to poll the spot prices of mentha oil. After a detailed study MCX has assigned the following weightages to these important centres:

Sambhal 25%, Barabanki 30%, Chandausi 15%, Rampur 15%, Badayun 7.5%, Bareilly 7.5%. This indexation of spot prices has made it attractive for the market participants as it is a broad reflection of the mentha economy.

Mentha oil price review-February ‘15..!

MCX March 2015 mentha oil futures contract closed the month at Rs. 782 per kg, up by 3.7%, largely driven by slow progress in sowing than that last year. Lower price realization by farmers in the previous season saw a waning interest in sowing, said trade sources.

Additionally, steady demand from exporters and the pharma sector amid restricted arrivals also caused prices to move up.

Benefits of futures trading..!

Numerous studies were conducted on the effect of futures market on mentha oil value chain participants. These studies were conducted by institutions like United Nations Conference on Trade and Development (UNCTAD), IIM Lucknow, and IIM Calcutta-NISTADS (National Institute of Science, Technology and Development Studies).

The major findings of the studies are that there was substantial improvement in spot prices, which has undoubtedly helped farmers realize relatively higher prices. Mentha oil production quality standards also improved as farmers moved away from a low-grade variety to a high-grade variety in efforts to conform to MCX quality standards.

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