7th June, 2011

HIGH LIGHTS:

Monsoon Prospects

Acreage Projections

Production Estimates

Trade Policies

Seasonality

Ratio Analysis

Technical recommendations for guar seed and guar gum:

NCDEX STRATEGY RANGE TARGET STOP LOSS

June 2011 Sell 3270-3300 3050-2850 3410

July 2011 Sell 3350-3370 3140-3000 3480

June/July 2011 Sell 10500-700 8800/8000 11600

GUAR SEASONAL REPORT

“After such a historic rise in prices of guar seed and gum, all the market

participants are looking forward for where the market will head from here. Good

progress of the monsoon and the expectations of rains to hit the major guar growing

regions by first week of July. The projections about the increase in acreage of guar

by 15 to 20 per cent might impact the market sentiments. China has imposed an

import duty of 7% and 15% on guar splits and gum powder respectively from India.

On contrary, there is no import duty for Pakistan.”

Review:

Guar seed and guar gum futures

touched their life time high

during the year 2011. The guar

seed and gum prices have gained

by around 54 per cent and 105

per cent respectively. The prices

surged to the lifetime high as

guar gum and seed touched

Rs.10538 and Rs.3351 levels

respectively during May 2011.

The arrival season (November-

December) of the commodity

attracted more export orders

across the spot markets. The

recovery in the global economy

after the slump during 2009

resulted in higher crude oil production. The guar gum which is mostly used in the crude

oil extraction purposes resulted in the good export orders of the guar gum during the

peak arrival season. The prices found cushion from the guar gum exports which rose

substantially during the CY-2010-2011. The crop damage in the major guar growing

regions across Pakistan led to the shift in export demand to India. Thus the prices rose

substantially during the Nov ’10- May’11 period. The crude oil prices crossing the 100$

mark in the international markets during the March month due to Libyan political

concern, boosted the demand for guar gum. The demand from the stockists and the

millers also rose substantially during this period; on anticipation of the demand to

continue in the long run. Though the fresh export demand was absent after the second

half of March, the perception of the demand to increase still drove the prices to their life

time highs. Some sharp corrections were also witnessed amidst this rally as and when

the international agencies predicted the monsoon forecast in India.

At a certain stage, the prices of the commodity sustained much above the actual value of

the commodity which could have been driven by speculators. After such a historic rise

in prices of guar seed and gum, all the market participants are looking forward for

where the market will head from here. So this report carries KCTL’S view for guar seed

for the upcoming sowing season.

Seasonality:

The seasonality in agri commodities includes price seasonality and the crop seasonality

as per their price movement and the cropping pattern over the years. Guar is a Kharif

Fig 1: Futures price movement (Nov’10- May’11)

2000

2200

2400

2600

2800

3000

3200

3400

3600

3000

4000

5000

6000

7000

8000

9000

10000

11000

Gum Seed Price

Source: Bloomberg and KCTL Research

crop in India which is generally sown during June-July months and harvested in

November-December. The scenario is the same in Pakistan, the second largest producer

of guar seed in the world.

Plantation

Harvest

Correlation of guar production and rainfall

Kharif being the sowing season for guar seed the major price influencing factor is the

progress of the monsoon. The statistical relationship between the rainfall and the

production is negative while the practical scenario is very different. The numerical

analysis might not include the sentimental impact of the rainfall on the prices which

occurs due to the traders’ perception about the rains. Along with the onset, the spatial

and temporal distribution of the monsoon also has major impact on guar price

movement. Thus the market dynamics plays an equal role in the guar price movement

along with the fundamental factors.

Production Rainfall Area

Production 1

Rainfall -0.646679109 1

Area 0.387120518 -0.527823697 1

Figure 2: Price seasonality Guar seed in India

Source: Bloomberg and KCTL Research

CROP CALENDAR

AREA:

The acreage under guar seed during the current year is expected to increase by around

15-20% compared to the last year. The acreage might be slightly above 3 million

hectares compared to 2.6 million hectares during last year. The returns fetched by

the commodity during the last cropping year might result in wide spread of the acreage

along with good monsoon prospects. The damage occurred in the cotton growing

regions might also result in conversion to guar acreage as the cost of re sowing in cotton

would be higher. The supportive weather condition for the monsoon to progress well

across the southern peninsula currently has opened up brighter prospects of the

monsoon across North Western regions of Rajasthan which might result in higher

acreage.

The sowing prospects across the Pakistan regions is also expected to progress well as

the south west monsoon is also forecasted well across Pakistan. Thus during the current

year a normal acreage under guar seed can be expected which might influence price

movement in Indian markets.

PRODUCTION

Production of guar is expected to be marginally above (78-80 lakh bags) as

compared to the average production which being 77 lakh bags per year. The rise in

acreage by 15-20% might not have major impact on production, thus retaining

production levels around the normal average in the last ten years. Some drastic changes

in the production can only be attributed to the distribution of the rainfall.

MONSOON PROSPECTS:

The south west monsoon arrived at the Kerala coast two days ahead of the projected

schedule. The current weather conditions are also supportive for the good progress of

the monsoon. As on date the monsoon has reached the Mahratwada regions and the

southern peninsula. Furthermore, the monsoon is expected to reach Rajasthan regions

by 20th of June and at the earliest. The rains might hit the major guar growing regions by

first week of July. The rains are expected to be normal during the current season which

could result in supporting the sowing prospects. The rain of 250-400 mm is expected

across the major guar producing regions which could help the crop growth. The

adverse effect of the monsoon cannot be ruled out for the current year, as the

international weather agencies are predicting good rains due to effect of La Niño

conditions.

TRADE POLICIES:

Recently, china- second largest importer of guar from India has imposed an import duty

of 7% and 15% on Indian guar splits and gum powder respectively. On contrary, there is

no import duty on Pakistan. This implies the re shift of 20% of export demand which

came in last year from India to Pakistan which due to the crop damage in Pakistan

during the last year.

GUM-SEED RATIO

In last 5 months average of ratio of guar

gum to seed is 2.87. The ratio has

increased to 3.19 which is so far the

highest in last 7 months. The movement

of the ratio of gum to seed has been on its

march towards north wards from the

yearly average of 2.4 levels during the

year 2011. The change in ratio is

determined by the individual demand for

gum and seed. This drastic increase in the

ratio was a result of surge in prices of guar seed and gum which was driven by the

export demand and speculative movement.

Further, we are expecting the ratio to decrease in the short run and touch its normal

levels as the demand is expected to gradually decline for guar seed across the spot

markets. The rise in guar gum due to inflated demand is not likely to continue further.

Thus prices would decline gradually leading the ratio to be at normal levels.

OUTLOOK:

The earlier on set of the monsoon at the Kerala coast is affecting the guar market

sentiments even though it has no direct relevance. The supportive weather conditions

for the progress of the monsoon are further expected to have a negative impact on the

prices. The monsoon showers are ready to soak the southern peninsula in a fort night

and reach the rajasthan regions by June 20th. The upper air circulations are also

suggesting the further good progress of the monsoon and the rains are expected to hit

the major guar growing regions by first week of July. The prices are expected to feel

pressure of rains and trade down side in the next 2-4 months. The projections about the

increase in acreage of guar by 15 to 20 per cent might impact the market sentiments.

The possibilities of the increase in acreage in guar seed is due to the sowing of the gaur

in the crop damaged regions under cotton. The physical market participants liquidate

their stocks across the spot markets which might pressurise the spot prices and have

the same impact on the futures. The absence of the demand while the arrival from stock

hit the spot markets might also result in down trend in the prices. The south west

monsoon not only supporting the production but also the same effect can be seen on the

guar growing regions across Pakistan. The crop is expected to be normal unlike the

drastic damage during the last crop year due to floods. The export demand which

shifted from Pakistan to India might not retain during the current crop year based on

the good sowing and production prospects expected there also. China has imposed an

YEAR MAX MIN AVERAGE

2005 3.15 2.12 2.63

2006 2.87 2.32 2.56

2007 2.74 2.34 2.51

2008 2.72 2.23 2.45

2009 2.35 1.98 2.13

2010 2.6 1.82 2.16

2011* 3.19 2.57 2.87

*Jan-May’11

import duty of 7% and 15% on Indian guar splits and gum powder respectively. On

contrary, there is no import duty on Pakistan. This preferential move as China is the

second largest importer of gum in the world might affect the India’s share of exports to

China. This might further weaken the prices in India in the short run along with the

expected higher acreage and the good production prospects. Later on the prices tend to

rise gradually as the crop harvest starts off across the irrigated guar growing regions

and the export consignments trickle in.

Technical Analysis

Guar seed prices are trading higher for the second consecutive month. Prices are witnessing

resistance at 3409 levels (previous month’s high). Only on breach and sustained trade above

may escort the prices to further highs. However, technical are rendering a bearish approach on

this commodity. Market is witnessing RSI Divergence along with price rise which is shown in

the chart 1. This can also be called as a Negative Divergence and suggesting lower potential. If

we look at chart2 prices are witnessing a rising Wedge formation on the weekly chart

suggesting downside potential. Any weekly closing below 3200 levels would confirm the down

trend. If we talk about the chart3 Gann theory suggest prices are likely to take correction on

the lower side as prices are witnessing 1x2 line resistances which is 63.75 degrees. On

sustained trade below is likely to test 1x1 lines which are 45 degrees. In the chart4 the Moving

Average principle suggesting a contraction as prices are witnessing a wide range between the

short and medium term EMA’s of (8,21&34 months). The principle of Fibonacci Projections

state that prices are witnessing crucial resistance at 3420 levels which is 100% projections of

the range 1440-2925-1935 levels. On sustained trade below may escort the prices to further

lows. Looking at the above analysis and relating these to price seasonality we believe Guar seed

prices to trade on lower in the coming months.

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