The prospect of a monsoon failure and the accompanying sub-optimal harvest should ideally make us turn towards the futures market to pick up early signals of what the market has got to say. This will help in reckoning imports if the need arises so as to eschew the predicament of paying higher prices at a time when a drought-like situation is also being witnessed in the US, which can skew the markets.
However, the chequered history of commodity futures trading only indicates that if there is a drought, then there will be a ban on futures trading in some commodity. It happened in the past when a series of commodities were removed from the ambit of futures trading, thus reducing the basket to a lighter one. The ministry of consumer affairs as well as the Forward Markets Commission (FMC) have started making these noises, which is unfortunate. More so because if the regulator says that it will ban futures trading, it is an admission of regulatory failure as it means that it does not know how to control price movements and that something is amiss in the market—something which has never been proved. The market has its tools to ensure fair play, such as price limits, margins and open interest; and the surveillance of the exchanges has so far ensured that there has not been any manipulation. Besides, when we do not have such things happening in the forex or stock market, why should they be considered in the commodity futures market?
The latest ban was on guar seed and guar gum, products that have become famous due to futures trading. A minor product which is largely exported, it is also a proxy for monsoon and any shortfall in production results in large increases in prices. Ironically, while the government does not mind increasing prices of products through the MSP, regularly causing ‘inflation’, any market-driven price increase based on economic fundamentals is looked at with suspicion, especially if it is traded on the futures exchange. A shortfall in guar production last year caused prices to increase and the FMC banned futures trading. But, did prices come down after March? Not really, going by the WPI numbers, which continued to show an increase in April and May before coming down in June. Quite clearly, we have our grip on the understanding of futures trading.
Last year, there was a deficit in production in mustard, chana, and soybean—three products traded well on the commodity exchanges. Prices have risen on account of these shortfalls, given that India does not stock any of these products and relies on imports to a large extent for edible oils, where over 50% is procured externally. Mustard output was down by around 17%, chana 8% and soybean 4%. These products could become easy targets for the FMC if push comes to shove, which will be incorrect and further send wrong signals.
Interestingly, the price increase for products not traded on the bourses that are high are in the case of bajra, barley and ragi among cereals, masoor in pulses, vegetables, milk, eggs and meat products and groundnut/oil and palm oil (imported). Further, rice and wheat have witnessed an increase of between 7-7.5% despite India having an all-time-high record of production. Therefore, inflation on the farm commodity side has been largely driven by supply mismatches and placing the blame on futures trading would be erroneous.
The problem with agriculture is that it is a neglected zone and has become a political issue. Last year, the surplus production in rice and wheat was highlighted as being a manifestation of successful agricultural production, when in fact there was a decline of 5.6% in pulses and 5.2% in oilseeds, both of which are supplemented through imports (edible oils for oilseeds). Also, coarse cereals had registered a marginal decline in production. Quite clearly there is an obsession with rice and wheat and we take pride in the large stocks of these two products even if it means senseless hoarding of foodgrains by the government, which creates artificial shortages in the market at times. The relentless increase of MSPs and open-ended procurement schemes has totally skewed the cropping pattern. Instead of addressing these issues to correct the imbalances, there has been a diversion of attention to other issues, which includes constantly banning futures trading in commodities.
History shows that after futures trading in tur and urad were banned in 2007, the prices increased continuously aided by higher MSPs, which increased benchmark prices as well as supply shortfalls. The same was the case with soy oil, chana and potatoes when they were banned in 2008 and sugar in 2009. Bans hence do not really help to bring down prices.
It may be recollected that in 2007, the government had set up an expert committee which concluded that there was not much to show that futures trading caused inflation. Yet, these thoughts do always come up when inflation is high. It looks more likely that instead of admitting that we have ignored this sector by not creating alternative channels for irrigation, the blame has been turned on futures trading. The fact that the FMC is not independent but an arm of the Ministry makes it easier. All talk on making the FMC autonomous by getting through the FCRA is still a distinct hope as the bill has been scuttled once too often and as long as we have this mindset, we will never move ahead in either bringing in reforms or bringing about a transformation of Indian agriculture. Either way, we are losing.
However, the chequered history of commodity futures trading only indicates that if there is a drought, then there will be a ban on futures trading in some commodity. It happened in the past when a series of commodities were removed from the ambit of futures trading, thus reducing the basket to a lighter one. The ministry of consumer affairs as well as the Forward Markets Commission (FMC) have started making these noises, which is unfortunate. More so because if the regulator says that it will ban futures trading, it is an admission of regulatory failure as it means that it does not know how to control price movements and that something is amiss in the market—something which has never been proved. The market has its tools to ensure fair play, such as price limits, margins and open interest; and the surveillance of the exchanges has so far ensured that there has not been any manipulation. Besides, when we do not have such things happening in the forex or stock market, why should they be considered in the commodity futures market?
The latest ban was on guar seed and guar gum, products that have become famous due to futures trading. A minor product which is largely exported, it is also a proxy for monsoon and any shortfall in production results in large increases in prices. Ironically, while the government does not mind increasing prices of products through the MSP, regularly causing ‘inflation’, any market-driven price increase based on economic fundamentals is looked at with suspicion, especially if it is traded on the futures exchange. A shortfall in guar production last year caused prices to increase and the FMC banned futures trading. But, did prices come down after March? Not really, going by the WPI numbers, which continued to show an increase in April and May before coming down in June. Quite clearly, we have our grip on the understanding of futures trading.
Last year, there was a deficit in production in mustard, chana, and soybean—three products traded well on the commodity exchanges. Prices have risen on account of these shortfalls, given that India does not stock any of these products and relies on imports to a large extent for edible oils, where over 50% is procured externally. Mustard output was down by around 17%, chana 8% and soybean 4%. These products could become easy targets for the FMC if push comes to shove, which will be incorrect and further send wrong signals.
Interestingly, the price increase for products not traded on the bourses that are high are in the case of bajra, barley and ragi among cereals, masoor in pulses, vegetables, milk, eggs and meat products and groundnut/oil and palm oil (imported). Further, rice and wheat have witnessed an increase of between 7-7.5% despite India having an all-time-high record of production. Therefore, inflation on the farm commodity side has been largely driven by supply mismatches and placing the blame on futures trading would be erroneous.
The problem with agriculture is that it is a neglected zone and has become a political issue. Last year, the surplus production in rice and wheat was highlighted as being a manifestation of successful agricultural production, when in fact there was a decline of 5.6% in pulses and 5.2% in oilseeds, both of which are supplemented through imports (edible oils for oilseeds). Also, coarse cereals had registered a marginal decline in production. Quite clearly there is an obsession with rice and wheat and we take pride in the large stocks of these two products even if it means senseless hoarding of foodgrains by the government, which creates artificial shortages in the market at times. The relentless increase of MSPs and open-ended procurement schemes has totally skewed the cropping pattern. Instead of addressing these issues to correct the imbalances, there has been a diversion of attention to other issues, which includes constantly banning futures trading in commodities.
History shows that after futures trading in tur and urad were banned in 2007, the prices increased continuously aided by higher MSPs, which increased benchmark prices as well as supply shortfalls. The same was the case with soy oil, chana and potatoes when they were banned in 2008 and sugar in 2009. Bans hence do not really help to bring down prices.
It may be recollected that in 2007, the government had set up an expert committee which concluded that there was not much to show that futures trading caused inflation. Yet, these thoughts do always come up when inflation is high. It looks more likely that instead of admitting that we have ignored this sector by not creating alternative channels for irrigation, the blame has been turned on futures trading. The fact that the FMC is not independent but an arm of the Ministry makes it easier. All talk on making the FMC autonomous by getting through the FCRA is still a distinct hope as the bill has been scuttled once too often and as long as we have this mindset, we will never move ahead in either bringing in reforms or bringing about a transformation of Indian agriculture. Either way, we are losing.
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