Excessive Speculation and Market Manipulation: The Guar Futures Trading Fiasco
The recent guar trading scandal gives a peek into the murky world of Indian commodity futures markets and reveals how commodity exchanges are acting like casinos for speculators, moving away from their avowed objectives of price discovery and price risk management in an efficient and orderly manner. Guar (Cyamopsis tetragonoloba) is a drought resistant crop grown mainly in Rajasthan and parts of Haryana and Punjab.
Guar seed and guar gum prices rose at an extraordinary rate during the six months period between October 2011 and March 2012. On October 1, 2011, guar seed was selling at Rs.4263 (US$77) per quintal. By March 2012, the guar seed prices had touched a high of Rs.32000 per quintal. The prices of guar gum surged almost 900 percent in the futures markets, from Rs.11230 per quintal on November 11, 2011 to Rs.98350 per quintal in March 2012. The trading in guar gum was hitting the upper circuit almost every other day in the futures markets during February-March 2012.
There is no denying the fact that strong export demand for guar products pushed up prices in the first four weeks but a 900 percent price increase cannot be attributed solely to this factor. The key factor behind the massive increase in guar prices was the excessive speculation – totally disproportionate to hedging activities of these two commodities in the futures markets.