How spice trading works in India? (Part 1 of 3)
Origins of spices
Every year millions of farmers grow spices in 10+ Indian states. India has been a hub of spices for 1000s of years. Not only do we feed our country but also export to the world. In last few decades, over 100 production hubs (APMC markets/Mandis) have become a large aggregator of these spices.
Traditionally, a farmer would harvest the crop and work with a farm-level aggregator to sell the crop in these production hubs. Open auctions are organized by kachcha arhtiyas daily (type of licensed APMC commission agent) where brokers, traders and manufacturers would bid to purchase crop.
Based on the prevailing demand and supply of specific grades of the crop on that particular day, farmer realizes the value of the crop and gets paid on cash basis
Efforts of government like eNAM and various tech enabled agritech startups have helped farmers with more competition in these auctions and help receive a better price for their crop.
Price discovery is a matter of financial risk management
You may have heard that the farmer doesn’t realize a competitive price while middlemen eat away all the profits in supply chain. In most cases, this emotional narrative is far from reality. Let’s quote a real example for context-
In Oct 2022, sowing period, a truck load of:
Cumin was ~Rs 270/kg
Coriander seeds was ~Rs 120/kg
In March 2023, harvesting period, a truck load of:
Cumin was ~Rs 600/kg
Coriander seeds was ~Rs 55/kg
There would be multiple reasons for why price volatility was so high between the dates of sowing and harvesting for farmers. Think of your favorite spices brand, how can they take a decision of when to buy and when to sell in such volatile markets? Alternatively, can a exporter sell coriander in October while delivery happens in march (Forwards contract) without taking the counter-party risk? These are matters of financial risk management!
Pricing of spices and in general all agricultural commodities is function of overall demand and supply factors in each trading market. No single middleman can influence the price in all markets at all times
Basis of any trading decision?
If there were buyers in APMC auction expecting prices would fall in coming months, would they buy goods or not? Let me illustrate another example-
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Traders and Manufacturers work in closely networked groups spread across few cities. Think of global spices market as a complex web of such network of SMEs. These networks have been trading for several decades and sometimes centuries.
Any commodity trading decision is based on 4 components-
Gross Trading margin: Buy — sell price spread
Gross Interest costs: Buy — sell credit spread
Gross price volatility costs/Loss on quality discounts: Change in price between purchase order date and delivery date
Gross Transaction costs: Commissions + Labour + Transport + Taxes
PS- In existing networks, cost of price volatility is transferred to a future transaction with the help of a broker. In a new buyer/seller scenario, credit spread is used to hedge this price volatility risk.
End Notes
- APMC- Agricultural produce market committee
- Trades happen in spices just like any other agri commodity
- Price is elastic to Supply and normally inelastic to Demand for most agri commodities
- All agri commodity pricing is derived based on the risk appetite of buyers and sellers
- Broadly there are 3 types of supply chains- farm to fork, farm to ship/ship to fork and farm to industrial use/industry to fork
- Fork- human and animal consumption
