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For Guar Gum, a Bubble Pops

MATHANIA, India—Pukhraj Parihar, a 50-year-old farmer from India's northwestern Rajasthan state, fears losing everything due to a bet he made on guar, the bean used by drilling companies to extract gas from shale rock.

Mr. Parihar, like many farmers in this arid land, gave up planting crops such as millet, lentils and carrots after the price of guar on the Indian market shot up sixfold in the eight months to May, primarily on demand from companies involved in the U.S. shale-gas production boom.

The run-up has brought a patina of prosperity to hardscrabble farming villages across India, which produces 85% of the world's supply of guar. Some villagers began constructing brick houses after years of living in mud huts. Mr. Parihar, who makes $7 a day, took his first bank loan to benefit from the modest rise in prosperity.

But a recent sharp decline in the export price for guar gum to $7,000 a ton, from a peak of $27,000 a ton in May, has caused trouble for the likes of Mr. Parihar. "I just hope that prices rise again. Otherwise, I am ruined," he said.

The bust also hurt oil-services companies like Halliburton Corp. that depend on guar gum, a product made from the bean in India and exported to the U.S. and other markets. The gum is used to thicken water that is mixed with sand and pumped horizontally into the cracks in shale rock to free the gas, a process called hydraulic fracturing.

Guar gum also is used in the food industry to thicken products like ice cream. Indian processors of the gum estimate global production at around 900,000 tons, generating $7 billion in export earnings.

What happened earlier this year was a classic bubble.

U.S. oil-services companies, worried that a drought in India would hurt guar output, began to stockpile the gum, which they buy from Indian processors or through commodity-trading companies like Connell Bros. Co., a division of Wilbur-Ellis Co.

At the same time, Indian-based commodity speculators began to ramp up the price of the bean and gum on local futures markets. In March, India's commodity-markets regulator suspended futures trade in guar after forward-contract prices skyrocketed, causing suspicions of market manipulation.

The ban, coupled with the later arrival of India's monsoon rains, caused prices to fall. The current crop, which farmers have just started to harvest, is set to double last year's haul.

Halliburton Corp.'s chief executive, David Lesser, has acknowledged buying too much of the bean at high prices in the second quarter, a move that hurt the company's profit margins.

A drop in global oil prices also has taken the shine off guar. U.S. production of gas has jumped by a third over the past five years. But as oil prices come down, pinching demand for natural gas, companies are less willing to pay higher prices for shale-gas drilling.

The future for guar—which means "cow's food" in Hindi—is uncertain. Rajasthan's semiarid climate makes it one of India's poorest states but also a perfect place to cultivate guar beans, which grow in pods on a low-lying plant. Pakistan, African nations and the U.S. produce small amounts of the bean.

Normally, India sells 60% of its guar-gum exports to the oil industry and 40% to the global food industry, which uses it to thicken products like ice cream and toothpaste. This year, though, the food services industry was deterred by the cost and bought only 20% of India's 625,000 tons of exports.

U.S.-based DuPont Co. DD -1.67 % looked instead for cheaper alternatives like the locust bean, which comes from the carob tree grown largely in the Mediterranean region. A spokeswoman for DuPont said the market for guar remains volatile and customers are yet to switch back despite lower prices.

Also shaken by the price run-up, drilling companies Halliburton and Schlumberger Ltd. SLB -1.01 % this year have launched polymer-based fluids which could eventually replace guar gum.

Michael Mbogoro, an analyst at Frost & Sullivan, said U.S. oil companies will turn more to these alternative products if guar prices again soar. As stockpiles decline, the price should recover, he said. A spokeswoman for Halliburton said the company is likely to draw down its inventory of guar gum by year-end.

But in Rajasthan, one of India's poorest states, farmers don't have time to wait for higher prices. Most farmers sell the beans to middlemen, who then trade it to wholesale markets where it is picked up by guar-gum processors.

Some farmers switched to the bean after India's largest processor of guar into gum, Vikas WSP, handed out free seeds and promised to buy directly from them.

B.D. Aggarwal, chairman of the company, said that he was advising farmers to sell only a portion of their crop now and wait, as he expects demand will revive shortly. Vikas WSP has been pushing the government to lift its futures-trading ban, which it says is necessary to help farmers to know what prices to expect.

Desperate for cash to repay loans at high interest rates, many farmers in Mathania say they will have to sell soon. Ramsarup Daga, a 60-year-old farmer from a nearby village, said he should have planted more millet, a crop used to make Indian bread. "I only wish that I had planted millet instead of guar this season. But I fell for the trap, just like everybody else," he said.

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