Secrets of an informal commodity exchange

The narrow streets of Old Dhaka's Moulvibazar hum with activity: commodity trading. On mobile phones, wholesalers fervently follow prices on trading floors in Chicago and London to bet on the local prices of sugar and edible oil. In and around tea stalls in this gloomy corner of Dhaka, even idle chats are centred around the price movement on the London Commodity Exchange, the Chicago Board of Trade, and the Bursa Malaysia.

Discussions become animated over the going rates of sugar and edible oil in the global commodity markets, production and weather forecasts. The reason for their enthusiasm is that these individuals are businessmen looking to invest in supply orders (SOs), a price-sensitive commodity trading system operated by a network of refiners and wholesalers.

We follow the international market to gauge the future movements of prices. Sometimes, our forecasts work and we make a profit, said Iqbal Hossain, who has been in the business for around 20 years

Wholesalers decide to buy or sell SOs of goods like sugar or edible oil, speculating on future prices to make a windfall profit. If a prediction goes awry, they incur huge losses. For example, wholesalers may pay an oil refiner in advance at a fixed rate for an SO, which can be used for the delivery of products at a future date. In the meantime, wholesalers buy and sell the SOs among each other at a margin when prices change, said Abul Hashem, president of the Bangladesh Sugar Traders' Association.

Individuals buy an SO if they believe the price will rise on the international market as a spike usually sends the price of the item upward in the local market as well.  

At present, there are around 3,500 wholesalers who deal in SOs in Bangladesh. Each SO entitles the bearer to 16 tonnes of sugar priced at Tk 22 lakh or 6 tonnes of edible oil at Tk 7.5 lakh.

An SO is usually valid for up to 15 days after being issued. However, in reality, the contracts are honoured by refiners even if the SO-holders show up two months after the deadline, according to Hashem, also the general secretary of the Bangladesh Edible Oil Wholesalers Association.

"We follow the international market to gauge the future movements of prices. Sometimes, our forecasts work and we make a profit," said Iqbal Hossain, who has been in the business for around 20 years.

"However, sometimes they don't work, prices fall on the international market, and we incur losses."

Recently, many wholesalers suffered losses because they could not predict the depreciation of the local currency against the US dollar, which has appreciated by about 30 percent against the taka in the past two years.

In 2011, the SO system replaced its predecessor – delivery order (DO), an old system used by millers. The DO business began in the middle of the 1980s when refineries were set up and they started importing large quantities of edible oil and sugar. The DOs became invalid after the government enacted the Essential Commodities Distribution and Distributor Recruitment Order 2011 as the previous system was said to be offering the scope for manipulation.

Since the facilities needed working capital, they sold DOs to wholesalers, who invested funds seeking future returns. Afsar Uddin, a trader in Moulvibazar, launched his business in Khatunganj of Chattogram when Bangladeshi firms began to import palm oil in the late 1970s. At the time, the business relied on cash memos. Wholesalers bought the paper receipts when imported products were in transit on the seas. Before the ship docked in Bangladesh, the memos changed hands several times. When the ship reached the port, the person who held the memos collected the goods. After that, they were free to sell it to retailers.

Md Shafiul Ather Taslim, director for finance and operation at TK Group, one of the leading importers and processors of commodities in Bangladesh, said the DO system had no specific timeline for dealers to supply products.

However, under the SO system, they are obliged to deliver products within 15 days. "The rule to deliver within a specific time has brought a major change to the supply chain," Taslim added.

He claims that there is no scope for price hikes at the consumer level due to the SO business. "At the end of the day, the business through the SO system benefits consumers."

Prof MA Taslim, a former chairman of the economics department of the University of Dhaka, says the SO-based market is functioning well.

"This is why we don't hear complaints from anybody even if they incur losses due to the international price fluctuation. They know that there is a risk of racking up losses."

SO-holders are also honoured even if they demand products from refiners after a long time. "You can say that it is a formal market in their view. It has been running for many decades and no manipulation about this system has been reported yet," Prof Taslim said.

The economist urged the government to formalise the system instead of introducing commodity exchanges overlooking established businesses.