By Ben Bland in Hanoi
The fledgling commodities operation of the Singapore Mercantile Exchange will launch the first global futures contract for black pepper on Friday in a move that some traders hope will set a global price benchmark and reduce the extreme volatility of recent years.
Pepper is one of the world?s most valuable traded spices, with the global trade worth about $1.5bn at the current price of about $6,000 a tonne, according to Saptak Gangopadhyay, vice-president of product and research at SMX.
SMX, which opened in 2010, is owned by an Indian company called Financial Technologies, which operates nine other niche exchanges in Bahrain, Botswana, Dubai, India and Mauritius. Despite ambitious goals, the SMX has struggled to make significant headway in Asian markets so far and the pepper contract will be its first agricultural commodity futures product.
With no existing hedging mechanisms, pepper prices have fluctuated wildly over the past few years, rising from a low of $2,000 per [metric] tonne in early 2009 to a peak of $7,800 per tonne late last year.
The new futures contract is supported by Olam International, the Singapore-based commodities house that is the leader in the global pepper trade, with a 10 per cent market share.
Greg Estep, the head of Olam?s spice business, hopes that black pepper futures will attract serious interest from exporters and leading buyers who want to protect themselves against large price swings.
?In a market such as that for pepper, the time farmers want to sell is different from the time customers want to buy,? he said. ?But without a good hedging mechanism, companies have to take on more risk than they would like through forward contracts or accumulating large stocks.?
Vietnam, which overtook India at the start of the new millennium as the world?s biggest pepper producing and exporting nation, will act as the delivery centre for the futures contract.
India, the world?s largest producer and consumer of spices, has its own futures market for pepper and other spices but it is domestically focused. Olam and SMX argue that the rise of Vietnam as the world?s leading pepper supplier has necessitated the launch of global pepper futures.
Mark Barnett, who runs the Pacific Basin Partnership, a spice processing and exporting company in Hanoi, expressed doubts, however, suggesting that the global pepper market was not wide or deep enough to support a liquid futures trade.
?It will create opportunities for more manipulation by key players?, but without reducing pricing risks for smaller companies, he said.
He warned that commodity traders in Vietnam, which is the world?s second-biggest exporter of coffee and rice, have a history of defaulting on forward contracts when they can get a better price in the spot market.
? The Financial Times Limited 2012