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Hedging Almond Price risk through Almond futures contract

by Sameer Patil (Chief Business Officer, BSE)
Jun 20, 2020

The fancy Diwali gift boxes, the healthy snack and vegan milk, all have one thing in common - the Almond! It is scientifically proven that Almond has significant health benefits for the heart, weight management and diabetes management. Unaware to most people in the country, India is one of the top consumers and importers of almonds in the world.

Almond Production and Consumption

Last year, India imported 131K tonnes of almonds, US$ 666 million in value terms and constitutes the largest market comprising 48% of global imports. Traditionally in India, the demand for almonds peaks during the festive season from September to January. The growing perception among Indian consumers about nutritional and health benefits associated with almonds is also driving demand beyond just the festive season. Data shows that Indian almond imports grew at an average annual rate of +9.8% from 2007 to 2018. This growth corelates with the growth of the Indian economy, and as income levels grow coupled with the rising health consciousness, the demand for almonds is only expected to grow. On the supply side, the United States is the dominant producer followed by Spain and Australia. California is the only state in the US which grows almond! So, 100% of the US’ almonds are California almonds. California almonds have more than 75 percent market share, as much as 18 percent comes from Australia. California's export of almonds to India is valued at about US$650 million, according to the US Agriculture Department and California Department of Food and Agriculture. India's domestic production is limited to the hill states of Jammu & Kashmir and Himachal Pradesh.

Product Crop cycle

Almonds are grown in a mild temperate kind of weather, cool rainy winters and dry summers, accompanied by rich soil, like the California valley. Almond plants are generally planted in February/ March, harvesting begins by July when the fruit begins to split open and between mid to late August the splits widens which exposes the shell and this allows the nut to dry. When properly stored, unshelled almonds generally stay at best quality for 2 to 4 weeks at room temperature and for about 12 months in controlled conditions (freezer).

Almond Variety

Almonds develop in a shell that is surrounded by a hull (analogous to the fleshy part of a peach). Over the summer, as the nuts mature, the hull dries and splits open, revealing a shell that encases the nut. The nuts dry naturally in this shell before they are harvested. Hence the 2 types, in-shell and shelled (one for consumption). India is the world’s biggest in-shell almond importer, but shelled almonds imports are a rarity. The reasons are quite straight-forward - it's more cost effective. Labour cost and employment generation has ensured that it is logical to import in-shell almonds and then shell them in India.

Hedging Almond Price Risk

Almond price has seen a remarkable growth of 4.4% in the eleven-year period from 2007 to 2018. The annualized volatility of almond spot prices is 13.23% over the last three years. uncertain. In June 2019, India imposed tariffs on almonds and 27 other American products, in retaliation for the US ending India's preferential trade status. According to news reports, these tariffs added about 12 cents per pound to shelled almonds, a 20% increase, and about 4 cents for those still in their shells, a rise of 17%. Similarly, the rupee's annualized volatility is approximately 8.3% when measured as annualized volatility of monthly percentage changes over the past 25 years. Rupee volatility also increases due to external factors such as 2012-13 taper tantrum episode as well as the current coronavirus situation. Given the volatility of both almonds and the Indian rupee, hedging price risk of almonds is vital for everyone associated in the value chain.

Launch of BSE Almond Contracts

Given the price risk and volatility, BSE is introducing monthly futures contracts on almonds on June 22, the first of its kind not only in India but globally. The contract trading unit is 1,000 kgs and base value is Rs. per KG. The maximum order size is 20,000 kgs, delivery units are 1000 KG deliverable at Navi Mumbai. The almond contracts will take the reference rate of Navi Mumbai APMC. The quality specifications should meet FSSAI standards with certified crackouts to be of 70% to be based on the net edible yield, with allowable crackout of 68%. The calculation of crack out will be as per net edible yield. These standard contracts are extremely convenient for producers and large importers, who can hedge their price risk. Although, the size of the almond market is small compared to other commodities, BSE has received lot of queries from traders, importers and consumers from not only in India but across the globe, given that it the first of its kind contract anywhere in the world. BSE is confident that the wide dissemination of almond prices on its platform will be used as reference prices for physical market transactions. BSE is also expanding ties with various physical market participants for strengthening of warehouses and other support infrastructure, which is essential for grading, sorting and quality certification, etc. The 3 exchange is still reaching out to participants and spreading awareness of the benefits of these products and looks forward to a wide participation in the future.

Going Forward

BSE is keen on making the commodity market more vibrant and inclusive, benefitting the entire spectrum of market participants, from producers to traders and end-consumers. Apart from providing its platform for stakeholders of commodities markets to hedge against the price risk, the exchange has provided participants with cost-effective and best-in-class technology solutions. BSE plans to systematically develop the commodity market via launch of more unique and innovative products, awareness and research with a view to provide a wider product range to the market participants.