The standard operating practice when it comes to tackling a price rise on account of shortfall in supply for any commodity is to first deny that there is a problem. Second, the suspicion is passed on to the hoarders even if the product involved is perishable like onions. Third, high stock limits are imposed on holding of such commodities by wholesalers and retailers with the penalty stretching to imprisonment.
When all else fails and there is futures trading in the product, a ban follows.
Curiously, almost always, none of these measures have worked as a decline in supply can seldom be addressed by any physical measure except imports. And by interpreting a useful signal, which is what futures prices are, as the cause rather than awarning, and going ahead with a ban, the damage done to the market is irreversible.
The ban on trading in chana futures is the latest episode in this futile exercise.
This has happened in the past in case of tur and urad, which were banned in 2007, and never came back on board. Wheat was agood contract which was banned and reintroduced, but lost the bounce that was there. Sugar and soya oil have also faced this onslaught in 2008 but have managed to recover.
The latest casualty is chana, which is a very good contract that had large number of participants and was hence widely traded. Trading was smooth with the exchange surveillance systems ensuring that there was no scope for control by any group of traders. The futures contract was banned in June 2016 but interestingly, three months down the line, the prices continue to soar.
The price of chana had increased from an average of Rs 6,477 in June when the ban was imposed to Rs 8,791/quintal in October –– an increase of Rs 2,314 or 35%. The increase over March when futures trading was in play was Rs 1,395/quintal.
Quite clearly, the price increase was higher after the ban than before the ban. It will also be illogical to say that the price increase was lower because futures trading was present as futures trading only reflects the market reality which is created by fundamentals and not by trading. This has been missed often when the conclusion linking the two is drawn.
Chana, which is the highest grown pulse in the country, where demand increases sharply during the festival time has witnessed decrease in production over the past two years. In 2013-14, it was 9.53 million tonnes, which came down to 7.33 million tonnes in 2014-15 and further to 7.17 million tonnes in 2015-16.
With lower production and disappearance of carry forward stocks, shortage of the product is palpable which has led to an increase in prices. The conclusion that can be drawn hence is that prices will mean-revert only if production improves or we are able import on a timely basis. We need to bring back chana futures.
When all else fails and there is futures trading in the product, a ban follows.
Curiously, almost always, none of these measures have worked as a decline in supply can seldom be addressed by any physical measure except imports. And by interpreting a useful signal, which is what futures prices are, as the cause rather than awarning, and going ahead with a ban, the damage done to the market is irreversible.
The ban on trading in chana futures is the latest episode in this futile exercise.
This has happened in the past in case of tur and urad, which were banned in 2007, and never came back on board. Wheat was agood contract which was banned and reintroduced, but lost the bounce that was there. Sugar and soya oil have also faced this onslaught in 2008 but have managed to recover.
The latest casualty is chana, which is a very good contract that had large number of participants and was hence widely traded. Trading was smooth with the exchange surveillance systems ensuring that there was no scope for control by any group of traders. The futures contract was banned in June 2016 but interestingly, three months down the line, the prices continue to soar.
The price of chana had increased from an average of Rs 6,477 in June when the ban was imposed to Rs 8,791/quintal in October –– an increase of Rs 2,314 or 35%. The increase over March when futures trading was in play was Rs 1,395/quintal.
Quite clearly, the price increase was higher after the ban than before the ban. It will also be illogical to say that the price increase was lower because futures trading was present as futures trading only reflects the market reality which is created by fundamentals and not by trading. This has been missed often when the conclusion linking the two is drawn.
Chana, which is the highest grown pulse in the country, where demand increases sharply during the festival time has witnessed decrease in production over the past two years. In 2013-14, it was 9.53 million tonnes, which came down to 7.33 million tonnes in 2014-15 and further to 7.17 million tonnes in 2015-16.
With lower production and disappearance of carry forward stocks, shortage of the product is palpable which has led to an increase in prices. The conclusion that can be drawn hence is that prices will mean-revert only if production improves or we are able import on a timely basis. We need to bring back chana futures.
No comments:
Post a Comment