Fracking Would Be Impossible Without This Tiny Bean
For U.S. hydraulic fracturing companies, access to the necessary resources is an important factor to operations and has created profit in a number of unlikely industries.
Each fracking well requires high amounts of water, for example, and the injection mixture requires sand. These two industries have grown since the start of the shale oil and gas boom, and related companies are expanding.
The process also requires guar gum.
Guar is a small bean produced mainly in India. The name is Hindi for “cow food,” and in gum form it becomes a thickening agent critical to the fracking process.
But with 85% of the world's production coming from Indian farmers, and with such high demand from U.S. oil and gas companies, the resource is in short supply.
For Indian farmers, this is a good thing. Many guar farmers, until now, have been poor and struggling to get by. But things have turned around as high demand has pushed up prices.
“Farmers can earn 100,000 rupees [$1,875 USD] per hectare, which can yield 20 bags of guar beans,” said Dr. Sanjay Pareek, vice president of Vikas WSP, a manufacturer and exporter of guar gum powder based in Rajasthan, India. “For lentils, which is the second biggest crop in this area, farmers get only 50,000 rupees per hectare.”
Of course, the price of guar gum has been volatile, hitting highs of 320,000 rupees, or $6,000, in the spring, and dropping to 20,000 ($377) by October.
There's also no futures market for the commodity, leaving investors to watch the price without speculation. Futures trading was banned six months ago by the Forward Market Commission (FMC) after prices jumped 1,000%.
But it's still a lucrative industry. It became India's main agricultural export to the U.S. in 2011, and seed distributor Vikas WSP has made deliveries to over 200,000 farmers since then.
Those who had previously farmed other crops, like cotton or lentils, are switching their trade.
But American oil and gas companies want to prevent the price from jumping back up or raising even higher.
Companies like Halliburton Co. (NYSE: HAL) have attributed the high price to their losses. Halliburton experienced a 19% drop in last quarter's operating income compared to a year before, and in a statement the company said this fall was “due to increased costs, particularly for guar gum.”
Some American farmers are seeking to profit from this sudden industry boom, a move that could also stabilize prices slightly. But some critics warn that this may not all be positive.
“Production in the U.S., should it grow, must be managed carefully. There are too many 'wannabes' inquiring about guar,” said Dr. Calvin Trostle, agronomist with Texas A&M University's agricultural program. “Most have no practical knowledge of the crop or what to do with it.”
For now, guar farming remains a hugely profitable trade in India. Exports have jumped 175% since 2009, and in 2011, Indian guar sales to the U.S. exceeded $915 million.
And guar futures trading may soon resume in India. A 45-member panel of the FMC is set to meet tomorrow after finding that the price increase didn't halt with trading. Consumer affairs minister KV Thomas has said that several more factors must be investigated, but the ministry has started to rule out speculative trading.
Commodity investors should watch for any news from the FMC because when trading resumes, it's likely to be extremely lucrative.+8
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