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Old 16th August 2011, 11:18   #271
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by gshanky View Post
What exactly is this?



I am repeating my questions here:


So, explain me - as of today where does futures trading of any consequential size between producers and consumers happen without big money center banks involved?

@gshanky RS_DEL is correct and you are under-rating farmers a lot. Most of them are smarter than many IT folks you will encounter in cities - all crop decisions are taken on a cost-benefit analysis.

Regarding role of contracts:

ITC (Ashirwad brand stuff) buys most of its grain in something similar to forward contracts - these are similar to futures, more details you can find on the internet.

McDonalds India buys all its potatoes from Indian farmers under contracts where price (usually a formula) is determined beforehand.


ALL farmers decide on which crops to buy based on a lot of information - some of this comes from futures markets too, but only fools would base their manufacturing (agriculture is similar) decisions solely on futures markets - farmers rely on journals of their own as well advice meted our by mandi folks - the latter invariably are heavily into futures and commodities markets.


And this information is here, now and on the ground. I personally know plenty of people who used to be traders in agricultural commodities (adhatias they were called) and many of them have now turned to futures trading. Also I know rice mill owners, sugar mill owners and have a few farmers in the family. All of them use futures to reduce their risk to some extent - also known as hedging (this by the way is the dictionary meaning of the word). Why I say some extent is because nobody buys 100% of their stuff in futures - that way you lose out if prices fall. They speculate based on their knowledge and feel of the markets.


Going internationally - almost all cash crops trading in the world (rubber, soybean ...) is futures or forward contract based. Large scale trading of foodgrains - ditto.



One of things that has been a major problem for Indian farmers has been uncertainty - monsoons, pests, prices are the three major problems. The first is taken care of by irrigation (to some extent), the second by pesticides (farmers are now trying to reduce their dependence) and the last by futures markets.




As far as "big money center" banks are concerned - forward contracts do not involve them at all. In futures markets also they act as "market makers" as well as "traders" - the two roles, even if played by the same bank, are different.



Again, if your questioning is genuine (i.e. from a desire to learn) you can find lots of information on internet in general (wikipedia and websites of respective commodity exchanges in particular) and correct the inevitable mistakes I might have made in the above discussion.
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Old 16th August 2011, 11:51   #272
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by vina View Post
@gshanky RS_DEL is correct and you are under-rating farmers a lot. Most of them are smarter than many IT folks you will encounter in cities - all crop decisions are taken on a cost-benefit analysis.

All of them use futures to reduce their risk to some extent - also known as hedging (this by the way is the dictionary meaning of the word). Why I say some extent is because nobody buys 100% of their stuff in futures - that way you lose out if prices fall. They speculate based on their knowledge and feel of the markets.

As far as "big money center" banks are concerned - forward contracts do not involve them at all. In futures markets also they act as "market makers" as well as "traders" - the two roles, even if played by the same bank, are different.

espective commodity exchanges in particular) and correct the inevitable mistakes I might have made in the above discussion.

@Vina: Thank you for the explanatory note.

I wish people would bother to atleast do a perfunctory reading of the subject they wish to hold forth on.

You are right about the dual roles of the finance houses in the commodity trade. Big money center finance houses have perverted the commodities markets by engaging in trading activities read the asset class nonsense. Their role as a market maker is of great consequence. However given the changing demographic scenario of the part of the world where demand is booming their trading activities have added fuel to the fire so to speak. This issue will gain center stage by and by as the dislocation caused by these people becomes more intolerable.

Last edited by RS_DEL : 16th August 2011 at 11:52.
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Old 16th August 2011, 12:35   #273
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by RS_DEL View Post
@Vina: Thank you for the explanatory note.

I wish people would bother to atleast do a perfunctory reading of the subject they wish to hold forth on.

You are right about the dual roles of the finance houses in the commodity trade. Big money center finance houses have perverted the commodities markets by engaging in trading activities read the asset class nonsense. Their role as a market maker is of great consequence. However given the changing demographic scenario of the part of the world where demand is booming their trading activities have added fuel to the fire so to speak. This issue will gain center stage by and by as the dislocation caused by these people becomes more intolerable.
The trading activities do add liquidity, the question is how much liquidity would you want. If 90% of the trading activity is being done by non-producer, non-consumer agents, then there is something very very wrong with the markets. This becomes even more significant if that 90% is being done by people who collectively hold less than 5% of the contracts - this means that they have formed a virtual casino out of these markets and then rigged the game by cornering the goods.

A tobin tax on trading will kill all high freqneucy trading without affecting long term investors (they provide liquidity of the good kind - that can not vanish at a moment's notice) and people with genuine hedging needs - a 0.5% tax base on transaction value (or 2% based on actual transaction proceeds) will kill all hidden high-frequency insider trading while it will be less than the cost of "chai-pani" for farmers, mandi people, and consumers.


I just realised that the discussion has been heavily .



so let us bring it on topic too - similar to agricultural commodities, but without a "poor farmer" analogy and this time with all parties having vast resources and skill are commodity markets for energy, specifically crude oil.

Same principles of speculation apply - most of the daily trading is done by people who hardly hold any oil contracts over a long term (even a week, most own for a few minutes if anything). Transactions are heavily leveraged and the volumes made large by this leverage so cornering the markets is easy. Given the inelesticity of oil markets, even cornering small percentages of the market can lead to very large non-linear variations in prices. And that is the game in play.

Last edited by vina : 16th August 2011 at 12:41.
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Old 23rd August 2011, 17:27   #274
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Minister of State for Petroleum and Natural Gas R P N Singh shared some figures today:

Without taxes, petrol would cost Rs 23.37 per litre (Delhi)
With taxes it is Rs 63.70 a litre (Delhi)
In US, the petrol price is Rs 42.82 per litre

Without taxes, diesel would cost Rs 24.90 a litre. (Delhi)
With taxes the price is Rs 41.29 per litre, (Delhi)
In US, diesel is priced at Rs 45.84 a litre

Source: Petrol in India costlier than US, Pakistan: R P N Singh - The Economic Times

He also says the current price of diesel in Delhi is Rs 4.97 a litre below its actual cost. This means Rs 4.97 is some kind of subsidy or un-levied tax on diesel, while Rs 19 (~63-44) is the penalty or extra tax on petrol.
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Old 23rd August 2011, 19:02   #275
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

I don't understand why the prices are compared with US price? why not UK/Dubai/Australia/or some other region?
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Old 23rd August 2011, 22:12   #276
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Because US prices are historically the cheapest and everyone likes to complain how the government is sucking us dry et all

If you compare Fuel prices with Europe, most would get a heart attack at how cheap we get fuel here.

PS: Another reason, more Indians go to US/have relatives there than Europe, and so have a better idea of fuel pricing there
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Old 24th August 2011, 00:59   #277
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by ethanhunt123 View Post
Because US prices are historically the cheapest and everyone likes to complain how the government is sucking us dry et all

If you compare Fuel prices with Europe, most would get a heart attack at how cheap we get fuel here.

PS: Another reason, more Indians go to US/have relatives there than Europe, and so have a better idea of fuel pricing there
I don't think the PS reason you gave is why most people quote US prices. Primarily U.S. prices are quoted (if even those are quoted - most people just crib) for the first reason you mentioned.



Quote:
Originally Posted by msdivy View Post
Minister of State for Petroleum and Natural Gas R P N Singh shared some figures today:

Without taxes, petrol would cost Rs 23.37 per litre (Delhi)
With taxes it is Rs 63.70 a litre (Delhi)
In US, the petrol price is Rs 42.82 per litre

Without taxes, diesel would cost Rs 24.90 a litre. (Delhi)
With taxes the price is Rs 41.29 per litre, (Delhi)
In US, diesel is priced at Rs 45.84 a litre

Source: Petrol in India costlier than US, Pakistan: R P N Singh - The Economic Times

He also says the current price of diesel in Delhi is Rs 4.97 a litre below its actual cost. This means Rs 4.97 is some kind of subsidy or un-levied tax on diesel, while Rs 19 (~63-44) is the penalty or extra tax on petrol.

In the same article there is some really interesting stuff - prices of diesel across Europe are lower than those for petrol even though there is no subsidy whatsoever for diesel in those countries. I'm not sure the figures are correct (in US prices are similar for petrol and diesel - but that may be because "gasoline" is treated there the way diesel is treated here - lower taxes than any other thing).

A lot of people on this thread have claimed that diesel should cost same or more than petrol - there reasoning for this is invariably based on how much diesel (vs. petrol) can be produced from a barrel of crude and the processing costs.

They invariably forget that there is another factor in pricing apart from cost - "demand".

In the absense of subsidies and preferential tax regimes, diesel may still turn out to be cheaper than petrol if for example the consumption of petrol far outstrips that of diesel. This is because whether you want it or not, whenever you refine crude (to sell it to petrol buyers) you invariably produce diesel as well, and if there are fewer buyers then you must reduce the price (production is linked to petrol, so can not be reduced solely based on diesel demand)

This may not be the case today in India (I don't have the current consumption data) but my guess is historically this was the case even in India, and this certainly is the case in Europe even today.
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Old 30th August 2011, 09:16   #278
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

The reason for buying a diesel car by incurring close to a lakh more in terms of money is to reduce the fuel bills. When this is the situation then what is the justification for making petrol and diesel rates per liter in the same price range. In that situation will diesel and petrol engine be sold at same price?
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Old 30th August 2011, 09:52   #279
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Originally Posted by rki2007 View Post
The reason for buying a diesel car by incurring close to a lakh more in terms of money is to reduce the fuel bills. When this is the situation then what is the justification for making petrol and diesel rates per liter in the same price range. In that situation will diesel and petrol engine be sold at same price?
Not exactly. Diesel prices are lower due to lower taxation. There is a view that the transport industry runs on Diesel, as does the Agriculture sector, so need to be supported. Obviously the very powerful truckers lobby supports this view.

By and large diesel cars cost more to manufacture, higher compression requires a tougher engine construction, larger battery and starter, more hardware to support the injection into the combustion chamber (now direct injection in petrol engines uses up some of this cost), sometimes a beefed up suspension and brakes. Whether the price differential should be that much is debatable. Some high end cars Beemers, Mercs and Audi's have (almost) the same price for both variants.
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Old 30th August 2011, 12:23   #280
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by sgiitk View Post
Not exactly. Diesel prices are lower due to lower taxation. There is a view that the transport industry runs on Diesel, as does the Agriculture sector, so need to be supported. Obviously the very powerful truckers lobby supports this view.

By and large diesel cars cost more to manufacture, higher compression requires a tougher engine construction, larger battery and starter, more hardware to support the injection into the combustion chamber (now direct injection in petrol engines uses up some of this cost), sometimes a beefed up suspension and brakes. Whether the price differential should be that much is debatable. Some high end cars Beemers, Mercs and Audi's have (almost) the same price for both variants.
Actually diesel cost slightly more to produce, hence it is more expensive in most parts of the world.

If you take into account the complexity of modern petrol engines - ECU, Injectors and at times turbos, the only extra cost in diesel engines is more robust build to take into account higher operating pressures. So diesel engines would be marginally more expensive, no where near what the current manufacturers charge a premium for. With current trend of CRDI technology, the extra stresses imposed by diesel cycle are also reducing, hence these engines are becoming much lighter compared to the older DI/IDI technology. Ultimately both types of engines would be priced close to each other, and the accessories would also converge to ensure that there is no significant manufacturing price difference between vehicles using the two fuels.

At this stage the choice would be
. Diesel : goot low end torque and better FE, excellent lugging ability
. Petrol : high revving engine with excellent high speed capabilities
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Old 5th September 2011, 23:09   #281
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Sorry to rejoin the conversation very late. I assume the thread has not moved on too much.

Quote:
Originally Posted by vina View Post
@gshanky RS_DEL is correct and you are under-rating farmers a lot. Most of them are smarter than many IT folks you will encounter in cities - all crop decisions are taken on a cost-benefit analysis.

Regarding role of contracts:

ITC (Ashirwad brand stuff) buys most of its grain in something similar to forward contracts - these are similar to futures, more details you can find on the internet.

McDonalds India buys all its potatoes from Indian farmers under contracts where price (usually a formula) is determined beforehand.


ALL farmers decide on which crops to buy based on a lot of information - some of this comes from futures markets too, but only fools would base their manufacturing (agriculture is similar) decisions solely on futures markets - farmers rely on journals of their own as well advice meted our by mandi folks - the latter invariably are heavily into futures and commodities markets.


And this information is here, now and on the ground. I personally know plenty of people who used to be traders in agricultural commodities (adhatias they were called) and many of them have now turned to futures trading. Also I know rice mill owners, sugar mill owners and have a few farmers in the family. All of them use futures to reduce their risk to some extent - also known as hedging (this by the way is the dictionary meaning of the word). Why I say some extent is because nobody buys 100% of their stuff in futures - that way you lose out if prices fall. They speculate based on their knowledge and feel of the markets.


Going internationally - almost all cash crops trading in the world (rubber, soybean ...) is futures or forward contract based. Large scale trading of foodgrains - ditto.



One of things that has been a major problem for Indian farmers has been uncertainty - monsoons, pests, prices are the three major problems. The first is taken care of by irrigation (to some extent), the second by pesticides (farmers are now trying to reduce their dependence) and the last by futures markets.




As far as "big money center" banks are concerned - forward contracts do not involve them at all. In futures markets also they act as "market makers" as well as "traders" - the two roles, even if played by the same bank, are different.



Again, if your questioning is genuine (i.e. from a desire to learn) you can find lots of information on internet in general (wikipedia and websites of respective commodity exchanges in particular) and correct the inevitable mistakes I might have made in the above discussion.
Vina, Lets clear the OFF Topic first

I am not unfamiliar to forward contracts,

1) My Grandfather was a farmer and tobacco trader and I had personally received advance money from many buyers on my grandfather's behalf since I was the lucky charm grandson back in the day

2) I do have a cousin having a rice mill in the rice mill town of kangayam in Tamilnadu and some family is involved in Turmeric mundy business in Erode.

3) I have a few friends in Kothagiri (near ooty) who are into farming for a long time. 100% of their produce are sold before even seeding. In fact they buy seeds with the deposit money after signing the agreement

4) Our family is traditionally into yarn business and my dad used to publish a price report/index report called "Coimbatore Yarn Market Review" which covered the last sales price from many spinning mills in the Coimbatore district. This was in the 80s and 90s when he was doing good business.

Now coming back to topic, all of my conversation with @rs_del has been about futures contract (as in commodities trading) and not forward contracts between a buyer and a consumer. So, all of the above information is moot point imo. However it is nice to have all the information in the thread.

I do assume that all the discerning readers would be able to read through the lines and get the point that forward contracts are never traded.


Quote:
Originally Posted by RS_DEL View Post
@Vina: Thank you for the explanatory note.

I wish people would bother to atleast do a perfunctory reading of the subject they wish to hold forth on.
I am letting this slide
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Old 6th September 2011, 14:26   #282
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

I agree with this. While driving about on holidays there Ive been paying the equivalent of roughly Rs 100 per litre of petrol there. the thing is that since the roads and infrastructure are so much better, so is one's overall fuel efficiency as well.


If you compare Fuel prices with Europe, most would get a heart attack at how cheap we get fuel here.
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Old 6th September 2011, 14:59   #283
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by gshanky View Post
Sorry to rejoin the conversation very late. I assume the thread has not moved on too much.

I am not unfamiliar to forward contracts,

I do assume that all the discerning readers would be able to read through the lines and get the point that forward contracts are never traded.

I am letting this slide

Please do not let it slide. I stand by my comment about ill founded arguements based on incomplete knowledge that I attributed to your arguements.

For your further information kindly refer to the link that follows. BTW there was no debate about forwards and futures. The only issue at hand was - risk hedging for trade/industry participants is a legitimate business requirement. Unnecessarily introducing arguments which have NO relevance to context does NOT add to the quality of debate that is being conducted. Nor is an attempt to establish yourself as more knowledgeable helpful to the cause of relevance to context.

Here is the link for your reference .

Forward Contract vs Futures Contract - Difference and Comparison | Diffen

Since I do not think the direction in which you are taking this discussion is of any relevance to the primary topic of this thread and further since a lot of irrelevant stuff has been discussed, of which I am guilty to a very large extent, I have no desire to argue any further on this with you.
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Old 8th November 2011, 13:37   #284
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Some info on decontrol of diesel prices - IS IT COMING?

"The Indian government’s chief economic advisor Kaushi Basu announced November 4 that the government ought to decontrol diesel prices in order to cut government fiscal deficits and (as a consequence) suppress inflationary pressures.
"I personally believe that we should decontrol diesel prices, which will take some pressure off the fiscal burden. And in the long run, it will cause inflation to go down," Basu said in an interview with Express India
Basu, who also heads a Prime Minister-appointed panel on inflation, said deregulating diesel prices will make India a more responsible country environmentally, because then ‘we will not encourage over-consumption of diesel vis-à-vis other more environment-friendly energy substitutes,’" according to the report.

See report on pg 7.

Cheers!
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Old 8th November 2011, 13:48   #285
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

In today's news papers there is an analysis that the actual cost of petrol is Rs.40/ and diesel should be near about that. Government the biggest gainer from petrol price hikes - Hindustan Times The rest of the price is just taxes amounting to 82K crores! If it wants, the government can easily rationalize the prices.

Note that this analysis assumes $110/barrel, so a reduction to $80/barrel (highly possible) will reduce the cost to to Rs.30/ or there about, and we can hope to get both the fuels between Rs.40/ and Rs 45/ if the Government really wants it.
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