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Mentha Oil Futures and Farmers

An analysis of futures trading in mentha oil suggests that excessive speculative interests lead to spurious price discovery and distortion in spot prices. Initiatives towards a judicious balance between genuine hedging and speculative interests will lead to excellent prospects for mentha farmers.


The paper identifies certain subjective fac-

Mentha Oil Futures and Farmers

tors that influence the farmers’ decisions to use futures and emphasises the need for creating better awareness and necessary K G Sahadevan institutional capacities including com-

An analysis of futures trading in mentha oil suggests that excessive speculative interests lead to spurious price discovery and distortion in spot prices. Initiatives towards a judicious balance between genuine hedging and speculative interests will lead to excellent prospects for mentha farmers.

The article draws on a broader study of the ‘Advantages of Commodity Futures Trading through Electronic Trading Platform for Farmers of Uttar Pradesh – A Study of Potato and Mentha’ carried out by the author in 2007 and funded by the Multi Commodity Exchange of India, Mumbai. An earlier version was presented at a seminar organised jointly by the Indian Society of Agricultural Economics and MCX on ‘Futures Trading in Agricultural Commodities’ at Mumbai University on September 28, 2007. The author wishes to acknowledge Joseph Massey and Chiragra Chakrabarty for their insightful comments. The usual disclaimer however applies.

K G Sahadevan ( is with the Indian Institute of Management, Lucknow.

ndian farmers are handicapped by many systemic inadequacies. They have been vulnerable for long to price distortions due to the long supply chain in marketing their produce. Lack of organised and formal marketing channels have resulted in lower price realisations making their investments non-viable and unattractive in many commodity segments. Moreover, in the absence of a developed and accessible futures market the farmers’ direct exposure to wild price fluctuations in commodities markets often makes it too risky for them to invest in otherwise profitable farming activities.

The National Agriculture Policy, 2000 has emphasised liberalisation aimed at augmenting farmers’ income and efforts to ensure that farmers receive prices commensurate with their efforts and investments. In line with its commitment for enlarging the coverage of futures markets to minimise price fluctuations as also for hedging risks, the government lifted all restrictions and permitted futures trading in all commodities in 2003 [Forward Markets Commission 2005]. However, in spite of India being one of the pioneers in commodity futures questions and concerns are still being raised by many about the economic benefits of futures and especially its utility to farmers. These apprehensions, have led the government to ban futures in socially sensitive commodities such as rice, wheat and tur and urad dal.

The present paper with the objective of assessing the benefits of mentha oil futures to the farmers, investigates the features of its physical market, supply chain and marketing practices in the state of Uttar Pradesh (UP) which enjoys monopoly production of mentha oil. The paper based on a survey carried out in a few major production and market centres in the state identifies the reasons for the lacklustre response of farmers to mentha oil futures and explores ways to make the market more accessible and beneficial to them.

modity aggregators and warehouse receipt system for the benefit of farmers.

Production and Marketing

Mentha (mint) is a seasonal cash crop grown in tarai and western districts of UP mainly Rampur, Moradabad, Badaun, Bareilly and recently extended to eastern parts covering Barabanki, Lucknow and Sitapur districts. UP is the leading producer of mentha with 80 per cent of the total production in India while Punjab and Haryana share the rest. The total area under mentha cultivation is estimated to be around 70,000 hectare with production of mentha oil to the tune of 14,000 metric tonne (MT) with market value of around Rs 700 crore in 2004. The latest available estimates show that the volume of production has increased to 32,000 MT in 2006 and expected to reach 63,000 MT by 2008 [UNCTAD and MCX 2007]. India is the leading player in the international market with an estimated export value of around Rs 150 crore during 2005-06. Mentha plays a very significant role in the agricultural economy of the state. The crop is economically significant not only for its contribution to the livelihood of thousands of farmers but also for its highly diversified industrial use in confectionary, cosmetics and pharmaceutical sectors.

Production of mentha oil which is obtained by steam distillation of mentha leaves is a high value adding activity. It is usually sown in February and harvested from mid-May onwards. The oil is a natural source of menthol which is one of the most actively traded commodities in the chemical markets in India. The market is characterised by wild fluctuations in prices due to strong seasonal demand. Its spot market price varied from Rs 350 during June-July to Rs 650 per kilogram during October 2006. Similarly, the average export price has gone up from Rs 382 in 2003-04 to Rs 418 in 2004-05 and touched as high as Rs 532 in 2005-06.1 It has the potential to obtain a fairly high profit

January 26, 2008 Economic & Political Weekly


margin. The estimates based on the cost prevailing during the crop season in 2006 indicate that it offers very high profit margins. The estimates are given in Table 1.

However, there are many bottlenecks which prevent the farmers from realising

Table 1: Estimated Average Expenses Per Acre Mentha

Particulars Expenses (Rs)

Seed (bought from market) 1,000.00
Fertilisers 700.00
Irrigation (14 times @ Rs 480 for each) 6,720.00
Insecticides and pesticides 500.00
Cost of Labour, tilling and sowing 3,000.00
Labour for weeding 1,500.00
Distillation @ Rs 35 per kg oil
(assuming recovery of 45 kg oil per acre) 1,575.00
Miscellaneous expenses 1,000.00
Total 15,995.00
Production of mentha oil (kg) 45
Storage cost 0.00
Value (at the best price @ Rs 675
per kg during end-October 2006). 30,375.00

Source: Field visits.

an attractive return on their investments. First, there is no organised formal market. It is primarily a local middlemen’s market. Local dealers and commission agents (‘arathiya’) interface between farmers and commercial distilleries. These distilleries not only meet the domestic industry requirements but also cater to the growing export markets. Second, as the distilleries deal in bulk (with a minimum deal size of one tonne) farmers do not have direct access to them. As the deal size is prohibitive to small farmers they resort to local dealers who in turn pool large volume of oil to deal directly with processors and exporters. The dealers buy oil from farmers at a huge discount on the prevailing market price. As there is no standardised quality check farmers are often misguided by dealers and forced to sell at a huge discount. Finally, farmers often resort to distress sale of oil to local dealers due to compulsions to square off debts soon after oil is extracted. While the market offers large margins, small farmers owing to their poor bargaining power in the supply chain are able to realise only low prices.2

Do We Need Mentha Oil Futures?

Futures markets in general offer four important economic benefits. First, they provide an efficient means of determining the future price of a commodity. The price discovery in the market provides the best

Economic & Political Weekly January 26, 2008

and the consensus market forecast of future prices of commodities traded in the market. The market is a guide to what various commodities are worth now as well as today’s best estimate for the future. Therefore, price discovery has the potential to minimise uncertainties with regard to future prices in commodity markets. It is of crucial importance to farmers and other players as it helps them predict their earnings and plan their future investments accordingly. Second, futures contracts are used for price risk management. Commodity futures markets offer farmers, dealers, processors, and consumers the means of passing the price risks inherent in their businesses to traders who are willing to assume these risks. This results in a more efficient marketing system and, ultimately, lowers costs to consumers. Third, since futures markets are national on-line markets which offer continuous auction of contracts they automatically ensure an integrated price structure across the country and also iron out supply-demand imbalances throughout the year. Finally, they act as focal point for the collection and dissemination of price statistics and other vital market information which provide valuable signals to all players in the markets.

As the production of mentha and the demand for mentha oil are seasonal, prices tend to fluctuate and show high volatility during the crop season and off season. For example, spot market price varied from Rs 350 during June-July to almost Rs 650 per kilogram during October 2006. The seasonality and instability of prices make the farmers’ income highly unpredictable and their investment unprofitable. Moreover, on the supply side,

mentha oil futures in the country. First, it has an active spot market though mostly concentrated in a few northern states in the country. Second, its production and marketing is a private activity without any mono polistic or government intervention to control prices. Third, it is a well standardised, storable and a high value and low volume commodity which does not require any expensive infrastructure for storage. Finally, as India is a leading producer with 80 per cent market share it has the potential to attract international trading interests in futures markets.

Currently, three national multi commodity exchanges offer futures in mentha oil. While Multi Commodity Exchange (MCX) of India and National Commodity and Derivatives Exchange (NCDEX) offer futures in mentha oil, National Multi Commodity Exchange of India (NMCEIL) trades in menthol futures. The MCX trading platform has recorded huge volume in mentha oil during the last two seasons. The total volume of trade registered during April 2005-Apirl 2006 is to the tune of 6.57 lakh tonnes worth Rs 40.6 thousand crore. A similar trend is seen in the current season as well. The volume during May-October 2006 has touched 3.67 lakh tonnes worth Rs 22.6 thousand crore with an average price of Rs 615.83 per kg. The December 2006 contract which opened on September 28, 2006 registered a volume of 14,762 tonnes which is close to the total production in the country. The combined volume of MCX and NCDEX during the last season has crossed 4.26 lakh tonnes which constitutes more than 20 times the physical market and is an indication of the growing interest in the market. The comparative

the market has no infor- Table 2: Mentha Oil Futures Traded on MCX and NCDEX
mation about the total (volume in MT and value in Rs crore) Contract MCX NCDEX Total
expected supply during Volume Value Volume Value Volume Value
the season as also about June 05 633363.48 39833.34 Data not
the stock positions. Similarly, no forecasts are April 06 May 06 June 06 30,480.48 28,808.28 1,373.92 1,356.80 Available 1,336.32 2,179.08 60.22 101.40 31,816.80 30,987.36 1,434.14 1,458.20
available as regards the July 06 53,437.32 2,784.42 5,369.40 268.37 58,806.72 3,052.79
demand for mentha oil. August 06 51,017.76 2,827.25 6,691.00 368.39 57,708.76 3,195.64
As a result, prices are September 06 45,222.84 2,740.66 4,565.16 265.38 49,788.00 3,006.04
subject to speculation. October 06 94,516.56 6,461.53 17,154.72 1,172.50 1,11,671.28 7,634.03
This makes mentha oil an November 06* 72,690.84 5,069.88 20,350.08 1,410.74 93,040.92 6,480.62

December 06* 14,762.16 1,037.10 16,549.20 1,092.83 31,311.36 2,129.93

ideal candidate for fu-

Total 3,90,936.24 23,651.56 74,194.96 4,739.83 4,65,131.20 28,391.39

tures trading. There are

* The MCX contracts for November and December 2006 cover the data only up to October 31, 2006 while other factors that favour NCDEX contracts have the data for the entire period up to December 20, 2006.


figures of total volume and value of contracts traded on MCX and NCDEX platforms are provided in Table 2 (p 73).

Do Futures Benefit Farmers?

It is often argued that the futures market is dominated by speculative interests driving the prices away from the underlying fundamentals in the spot market. The lack of convergence between these two closely interdependent markets often fails to generate confidence among genuine hedgers. The data disclosed by MCX show that its mentha oil futures contract is being actively traded in as many as 183 cities across 20 states as of February 2006. In UP alone, 28 cities have been reportedly covered by the trading network of the exchange. This is an indication of the wider reach of and participation in the market. There are also reasons to believe that farmers have benefited from futures. First, the physical market has reacted with substantial upward movements in prices. As Table 3 shows the average

Table 3: Spot Market (Sambhal) Price of Mentha Oil

(in Rs per kg)

Season 2006 2005 2004 2003

Mid February-April 474.85 392.57 304.65 NA

(27.68) (14.32) (4.97)

May-November 561.51* 442.83 365.61 279.30**

(92.45) (44.79) (74.80) (2.84)

December -mid-February NA 663.77 378.83 303.60

(76.88) (21.20) (14.35)

May-April 561.51 496.15 373.42 296.16

(92.45) (101.61) (59.82) (14.66)

Average Export Price*** 548.00 532.00 418.00 382.00 Figures in parenthesis indicate average price variation as measured by standard deviation

* The period covered only up to October 2006. ** The period starting from October 16, 2003. *** Financial year data. For 2006, the value shows the average price during April-June only. Source: Estimates based on spot price data obtained from MCX, Mumbai. DGCI&S, ministry of commerce, government of India.

price during the peak arrival season between May and November in 2004 was Rs 365.61/kg while during its peak demand season between December and mid-February an average price of Rs 379 only was recorded. However, the corresponding prices during 2005 have been Rs 443 and 664 respectively which indicate a substantial jump in the prices due to better price discovery in the futures markets. Though the local dealers are not passing on the full benefit of increased prices to farmers, indications are that farmers were able to get better prices during the last two seasons.

While the post-harvest price moved up from Rs 289.70 in 2004 to Rs 369.3 and

448.20 in 2005 and 2006 respectively, the pre-harvest price rose to Rs 662.45 in 2006 from Rs 352.5 in 2005. The trend shows that the spot prices have strengthened after futures trading began in April 2005. It is logical to expect that farmers are therefore indirectly benefited by the increased spot prices even if local dealers do not pass on the entire price benefits to them. The significant price difference between the spot and futures markets that prevailed during the last two seasons has further strengthened the findings. While average spot market price during the last season was Rs 495 the corresponding futures market price was Rs 618 per kg. The prices have shown a different trend during the current season. As against Rs 616 prevailed in futures market during May-October 2006 the average spot market price in Sambhal registered an average of Rs 562. This indicates that the price discovery in futures has helped strengthen prices in spot market and the price discovery and its dissemination help farmers gain indirectly from futures markets.

Second, the average export price of mentha oil has shown substantial improvement after the introduction of futures. It has gone up to Rs 548 per kg in 2006 from as low as Rs 382 in 2003 and Rs 418 in 2004. The increased international market value help farmers get a better price while it adds to foreign exchange earnings of the country. Finally, the area under mentha cultivation and its production have been increasing over the years. The area under cultivation in Barabanki has increased from 31,000 hectare to 40,236 hectare during the last one year. The national level statistics also reveals a similar trend. This could be attributed to better price realisation especially after the launch of futures trading. However, it may be noted that, given the socio-economic profile of farmers, the rural farming community is more likely to enjoy indirect benefits such as improved and transparent price forecasts than the direct benefits from initiating positions in futures markets. Even in the US, where futures in agricultural commodities are more than a century old, only a small percentage of farmers use them directly. In the majority of cases they access the market through farmers’ associations/cooperatives, processors and traders [UNCTAD 1997]. On the contrary, commodity futures markets in India are in the nascent stage not only with regard to direct participation of farmers or aggregators who operate on behalf of farmers but also in terms of awareness about its utility.

Farmers Shy Away from Futures

The sample survey carried out among farmers in the three major mentha growing districts in UP of Moradabad, Rampur and Barabanki revealed that farmers’ participation in futures market was abysmally low3. There are three important reasons for this. First, though they are exposed to price risk the storability of oil without loss of its value saves them from the risk of selling when the price is the lowest during the May-July season. Moreover, not only do the farmers have the advantage of limited seasonal supply, its demand too is significantly seasonal. This assures them fairly predictable higher prices during November-February when the demand is high. Second, it is observed that farmers’ awareness about futures market in general is poor. Out of 30 samples examined only seven are found to be aware of the market. And those who are aware have never taken positions while only two of them have shown an interest in initiating position in futures market. Finally, a large majority of farmers are not able to access futures markets directly because they lack the critical minimum size in terms of quantity of production to fulfil the contract specifications.4 The market lot is prohibitive as no pooled investors (aggregators) are currently operating on their behalf.

There are two important factors that determin the market participation. They are (a) hedging performance of the futures contracts, and (b) the market’s perception about the futures trading. The hedging

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January 26, 2008 Economic & Political Weekly


performance is measured by convergence of the markets. The convergence between futures and spot prices shows that futures market is efficient with regard to price discovery and hedge against the spot price variability. However, the historical performance of mentha oil contracts as shown in Table 4 has not consistently supported this condition. The opening and closing

Table 4: Spot and Futures Prices of Mentha Oil

(Prices in Rs/Kg)

Contract Opening Spot Price Closing Price
Price on Expiry on Expiry
January 31, 2006 458.90 646.0 638.0
February 28, 2006 591.4 486.3 485.4
March 31, 2006 945.2 452.8 451.3
April 30, 2006 784.9 483.1 483.8
May 31, 2006 446.5 466.2 471.6
June 30, 2006 432.0 505.1 498.4
July 31, 2006 434.7 537.2 540.9
August 31, 2006 438.9 554.7 556.9
September 30, 2006 466.2 701.8 693.7
October 31, 2006 535.2 656.7 659.3
November 30, 2006 593.3 656.3 664.3
December 31, 2006 744.5 642.9 605.3

Source: MCX India, Mumbai.

prices of 12 contracts that matured during the calendar year 2006 along with spot prices on the expiry date of the contracts are reported in Table 4.

The decision to hedge in the market is also influenced by certain subjective factors including attitudes and perceptions. Ennew et al (1992) point out that futures as a service offered by exchanges have a number of characteristics which affect the way in which they are perceived by potential users. As services are intangible, futures lack physical form making its evaluation difficult prior to purchase. Moreover, futures are mentally intangible too. This is because of the poor educational background especially of rural farmers. They find it difficult to understand the modern risk management concepts and the operational aspects of the markets.

Furthermore, because a user cannot personally evaluate the market prior to purchase there is likely to be a high degree of reliance on subjective impressions based either on the user’s own perceptions or on the experience of other users. The survey results revealed that potential players in the market carry negative attitudes and wrong perceptions about futures. Almost all the respondents carry negative perception about futures. Those who do not have sufficient information

Economic & Political Weekly January 26, 2008

about the operational details of the market have developed negative perceptions and most of them cited lack of information about the functioning of the market as the reason for not using futures. It is judged from the results that the pitfalls of the futures markets have received much greater publicity than their benefits primarily because of the negative perception created by lack of political consensus on the need of futures.

Improving Farmers’ Participation

It is imperative that in addition to creating awareness of the benefits, certain specific and focused action plans are required for developing a vibrant market. The initiatives of the market authorities and regulators towards generating awareness and removing wrong perceptions have not been enough to improve the market penetration. As pointed out in an UNCTAD study [Combe 1997], the market requires three important initiatives for improving farmers’ participation and better penetration of futures. First, there are certain legal preconditions. If farmers’ associations should complete a role of intermediary in marketing chain, they should have the same possibilities as a trader. In terms of legal rights, they would have access to physical and futures markets without restrictions and have access to formal credit sector as an enforceable counterpart. They should be able to trade, act in over-the-counter market towards farmers but especially towards traders or even exporters. The government could also initiate cooperative societies and state level marketing agencies to play the role of aggregators on behalf of farmers [Sahadevan 2002].

Experiences of many countries show that farmers’ associations, marketing agencies and cooperatives could be potential aggregators in farm sector. This calls for building necessary institutional capacity for warehouses and credible collateral management which would ensure availability of collateralised finance to farmers. Commodity exchanges can be a market place for trade in warehouse receipts which would help the development of a sound warehousing and warehouse receipt financing system [Sahadevan 2004].

Second, access to market information is crucial not only for changing the attitudes of farmers and building their confidence in the market but also for improving transparency, efficiency and reliability. This could be taken care of by establishing formal channels to disseminate market information uniformly across various players in the market. Government must take initiatives in this direction to create infrastructure for sustainable growth of agriculture. This will be a step towards creating productive and sustainable market-driven support system for agriculture than providing direct subsidy which creates stress on government finance. The public service for collection and dissemination of information such as prices, crop forecast, quantity traded, stock positions, quality premiums and discounts, government storage policy and so on could create a more level playing field.

Finally, regular awareness-raising, orientation and training programmes are essential in view of the prevailing widespread negative perceptions. The subjective factors like attitudes and word of mouth advice will influence the decision to hedge more than that of the objective factors. This is because the objective analysis of the market’s hedging performance is constrained by relatively weaker characteristics of the market as reflected by low volume and depth and high volatility especially during its nascent stage. Nevertheless, farmers and more importantly, the leaders of farmers’ associations have to become aware of the existence of these markets, and pass through a process reflecting on how they can be useful for farmers’ day to day operations. Once these prospective players are educated about the potentials of futures, training them on operational aspects of markets should follow.


Futures trading has always remained under the cloud of scepticism. The market of late has become more than ever vulnerable to the government’s dilemma with regard to its utility especially to farmers. The government and the market regulator have commissioned many studies in the past and received expert opinions on the usefulness of futures. The World Bank-funded


The experience with futures in guar seed, mentha oil, castor seed, etc, shows how important the existence of an active spot market is to promoting futures. Moreover, futures trading leads to spurious price discovery unless the market is broad based with enough speculative as well as genuine hedging interests operating in it. As one without the other cannot sustain the market for long, it is imperative that the market gets more participation from genuine hedgers while existing speculative interests are not driven away.


and 720 kilogram (kg), respectively and the average production per acre being 45 kg, a farmer holding eight acres has been treated as a suitable sample for the study. Therefore, each sample chosen for the study has the potential to take at least one unit of contract. This ensures that they are potential individual players as genuine hedgers in futures markets.


Combe, M Oliver (1997): The Role of Farmers’ Association in Commodity Price Risk Management and Collateralised Commodity Finance, UNCTAD, Geneva.

Ennew, Christine; Wyn Morgan and Tony Rayner (1992): ‘The Role of Attitudes in the Decision to Use Futures Markets’, Agribusiness, Vol 8, pp 561-73.

Forward Markets Commission (2005): Safeguarding Futures, ministry of consumer affairs, food and public distribution, government of India, Mumbai.

project which was implemented in 2001 has brought to light through a number of consulting reports the direction of reforms to be initiated for strengthening the futures markets in India. A joint project initiative, Commodity Futures Market Development Project of the government and the United States Agency for International Development (USAID) has concluded in 2005 and yet another India Commodity Futures Market Project of USAID is currently on.

However, consensus within the government and among policymakers still remains elusive leaving the market to speculate on government policy. Serious concerns are raised about inadequate preparedness of the small farmer dominated agricultural economy to absorb modern risk management concepts like futures. The misgivings about the market continue to remain as the government lifted the ban and approved contracts in all commodities without making proper impact assessment. Time is now ripe for pragmatic and active regulatory intervention while choosing commodities for futures as well as at the time of formulation of contract specifications.

1 Trade Statistics, Director General of Commercial Intelligence and Statistics, ministry of commerce, government of India.

2 Report of the Working Group on Warehouse Receipts and Commodity Futures, Reserve Bank of India, Mumbai, 2005.

3 Samples are farmers who have at least eight acres under mentha crop in three densely cultivated areas such as Sambhal in Moradabad, Sadar in Rampur and Fatehpur in Barabanki districts. Ten samples were chosen from each area with the help of the officials of the respective district horticulture office. The judgment of the district horticulture inspector with regard to identifying progressive farmers was duly considered in all these areas while selecting the sample.

4 Considering the standard trading and delivery unit for mentha oil on MCX platform being 360

Sahadevan, K G (2002): ‘Sagging Agricultural Commodity Exchanges: Growth Constraints and Revival Policy Options’, Economic & Political Weekly, Vol XXXVII, No 30, July 27-August 2, pp 3153-60.

– (2004): Commodity Derivatives and Futures Trading: A Study of the Sources of Market Failure and the Policy Options for Its Revival, Forward Markets Commission, Mumbai.

UNCTAD (1997): ‘Government Policies Affecting the Use of Commodity Price Risk Management and Access to Commodity Finance in Developing Countries’, UNCTAD/ITCD/COM/7, UNCTAD, Secretariat, Geneva.

UNCTAD and MCX (2007): A Study of Mentha Oil Ecosystem, Global Study Group on Commodity Futures Exchanges in Emerging Market, MCX India, Mumbai.

January 26, 2008 Economic & Political Weekly

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