ising prices and the spectre of possible bans in futures trading have become habits which need to be prevented. Futures markets are a reflection of what will happen in the coming months which is embed ded in the price and hence cannot be the reason for present price movements. Sugar prices have been increasing for the last year or so. NCDEX October 2016 contract has shown an upward tendency since October 2015 with the price closing in at the Rs 3,000 per quintal range. The ` reason: Sugar production has come down by 3 million tonnes in 2015-16 season.
The gradual ascent of prices in the last couple of months is contemporaneous with the fact that sugarcane production is to get affected by lower acreage this year too leading to drop in production to 2.5 to 3 mn tonnes. Last year, when there was drought, there were voices raised on sugarcane being a water guzzler and the need to restrict production. Now, futures market has given us prior indications and such information should be used by the government to take corrective action like considering imports to fill the gap.
A case made in political circles is that there is hoarding due to futures trading which is driving up prices.But consider these facts of trading on NCDEX. Open interest, which is the potential amount that can be delivered on expiry and hence is an indicator of possible `price control', has been as low as 40,000 tonnes out of a production of a little over 25 mn tonnes.
With open interest being 0.15% of total availability, it is hard to believe that this can influence prices. A paradoxical issue which comes up often is that there are too few deliveries in futures contract. With the government putting stock limits of 500 tonnes even for trading in futures markets, it is not possible for deliveries to be continuous though the position limits are 5,000 tonnes for the near month contract. Blaming the futures market for price rise is illogical.
When supply falls, higher prices cannot be eschewed. It was the case with pulses last year and will be with sugar this year. Even in the past, when futures were banned, prices never came down. We only lost an important tool which can be used for taking corrective policy action. We should ensure that we do not lose this lever this time.
The gradual ascent of prices in the last couple of months is contemporaneous with the fact that sugarcane production is to get affected by lower acreage this year too leading to drop in production to 2.5 to 3 mn tonnes. Last year, when there was drought, there were voices raised on sugarcane being a water guzzler and the need to restrict production. Now, futures market has given us prior indications and such information should be used by the government to take corrective action like considering imports to fill the gap.
A case made in political circles is that there is hoarding due to futures trading which is driving up prices.But consider these facts of trading on NCDEX. Open interest, which is the potential amount that can be delivered on expiry and hence is an indicator of possible `price control', has been as low as 40,000 tonnes out of a production of a little over 25 mn tonnes.
With open interest being 0.15% of total availability, it is hard to believe that this can influence prices. A paradoxical issue which comes up often is that there are too few deliveries in futures contract. With the government putting stock limits of 500 tonnes even for trading in futures markets, it is not possible for deliveries to be continuous though the position limits are 5,000 tonnes for the near month contract. Blaming the futures market for price rise is illogical.
When supply falls, higher prices cannot be eschewed. It was the case with pulses last year and will be with sugar this year. Even in the past, when futures were banned, prices never came down. We only lost an important tool which can be used for taking corrective policy action. We should ensure that we do not lose this lever this time.
No comments:
Post a Comment