Futures trade in agriculture commodities had another bad day on 7 May 2008 with FMC announcing suspension of futures trade in four commodities namely chana, soy oil, potato and rubber for four months that is till 6th September. Government has already de-listed four major commodities like wheat, rice, urad and tur in January – February 2007. Government was under pressure from various political parties for last few weeks to impose ban on futures trade in essential commodities, alleging futures trading is responsible for sharp rise in prices. Inflation remained above 7% for four consecutive weeks from March onwards.
Commodity futures provide platform for farmers, traders, exporters and other corporates to hedge their positions. Speculators provide liquidity in the market with active participation. Prices of any commodity follow its own fundamentals and price manipulation by few traders is not possible if it is perfect market.
Supply-Demand mismatch
Prices of agriculture commodities especially edible oils, chana and rubber rose sharply in the past six months. Soy oil prices gained by about 35% with in short span of in five months (October 2007 and February 2008) and touched Rs.740 per quintal in domestic markets. Domestic prices moved up sharply tracking global prices especially CBOT and MDEX. At CBOT, prices gained by about 47% during same period. Global Soy bean output has declined by 7 percent to 220 million tonnes in 2007-08 against 237 million tonnes in previous year. Edible oil seeds production has also declined to 390 million tonnes compared to 408 million tonnes in last year. Major fall in soy bean output was in US with decline of around 20% in this season. Short fall in global output of soy bean and shifting large chunk of agriculture produce for bio-fuels led to sharp gain in prices of all the edible oils.
Chana prices also have gained by more than 30% in the last six months due to lower output concerns. Production of rabi chana 2007-08 estimated below 50 lakh tonnes compared to 58 lakh tonnes in previous year. Carry forward stocks are almost nil. Prices were trading at one year low of Rs.2000 per quintal during end of 2008 and lower estimates led to sharp rise in prices towards Rs.3000 per quintal in last 4-5 months. India imported more than 1.2 million tonnes of pulses in 2007-08 and failed to keep prices low as import prices ruled high. India annually produces about 13-14 million tonnes of pulses and this output almost stagnant for last 15 years. Consumption is rising every year with increasing population. India is largest importer of pulses and import about 2-3 million tonnes.
Rubber prices have gained by 23 percent in the last four months in domestic markets. Rubber global production is 9.89 million tonnes in 2007 compare to 9.68 million tonnes in 2006, while, consumption has increased to 9.73 million tonnes in 2007 from 9.21 million tonnes in 2006. India has produced about 8.25 lakh tonnes in 2007-08 compare to 8.53 lakh tonnes in previous year. Increasing demand for rubber in global markets and strong crude oil prices led to sharp rise in prices in recent past.
Potato prices fell from recent high of Rs.650 levels to Rs.450 with in span of one month with increasing arrivals. Output estimated at 28-29 million tonnes in 2007-08 higher from 25 million tonnes in previous season. Higher arrivals and lack of demand pulled down the prices of potato. Few state governments including West Bengal provided intervened in spot markets to support the prices.
Government measures
Government took various measures to control the rising prices of food commodities. It reduced import duty on refined edible oil from 40-45% to zero percent in March 2008 to control the rising prices of edible oils. India import about 50% of total domestic requirement and is price taker in global markets.
Price movement especially in Malaysia and US has direct impact on domestic markets. Edible oil prices have marginally come down in the past one month after Government reduced import duty on edible oils. Soy oil prices fell by Rs.150 per quintal with in span of one month. Apart from reducing import duties on edible oils, Government also directed states to strictly impose the stock limits on food grains and pulses.
Various states including Maharashtra, Andhra Pradesh and Delhi conducted raids on stock hoarders to bring out the excess stocks. This led to panic selling of pulses in spot markets and led to sharp fall in prices of most of pulses. Chana prices fell from recent high of Rs.3000 levels towards Rs.2300 with in one month period.
Impact of recent Government measures
In spite of taking these many measures, inflation remained high and touched 42 month high of 7.61% for week ending 26th April. Prices of most of agriculture commodities fell in the past few weeks as a result of Government intervention and also declining demand at higher levels apart from fall in prices of edible oils in global markets. However, higher prices of non-agriculture commodities like steel and cement remained high boosting inflation further.
Outcome of Abhijit sen committee report
Abhijit sen committee was constituted in March 2007 to study the impact of futures trade on agriculture commodity prices. it submitted report on 29th April 2008 to Government. It found no evidence of futures trade affecting the spot prices of agriculture commodities. His statements was, "I don't think one can say anything conclusively whether futures impacted prices," after submitting the report to Agriculture department. It recommended continuation of futures ban on wheat, rice, urad and tur, but not recommended any fresh ban on any commodities.
Is suspension justified?
Now big question arises as to what was the need for suspension of futures trade in four agriculture commodities when prices of edible oils have already eased and they are largely influenced by global factors rather than domestic factors.
Commodity futures provide platform for farmers, traders, exporters and other corporates to hedge their positions. Speculators provide liquidity in the market with active participation. Prices of any commodity follow its own fundamentals and price manipulation by few traders is not possible if it is perfect market.
Supply-Demand mismatch
Prices of agriculture commodities especially edible oils, chana and rubber rose sharply in the past six months. Soy oil prices gained by about 35% with in short span of in five months (October 2007 and February 2008) and touched Rs.740 per quintal in domestic markets. Domestic prices moved up sharply tracking global prices especially CBOT and MDEX. At CBOT, prices gained by about 47% during same period. Global Soy bean output has declined by 7 percent to 220 million tonnes in 2007-08 against 237 million tonnes in previous year. Edible oil seeds production has also declined to 390 million tonnes compared to 408 million tonnes in last year. Major fall in soy bean output was in US with decline of around 20% in this season. Short fall in global output of soy bean and shifting large chunk of agriculture produce for bio-fuels led to sharp gain in prices of all the edible oils.
Chana prices also have gained by more than 30% in the last six months due to lower output concerns. Production of rabi chana 2007-08 estimated below 50 lakh tonnes compared to 58 lakh tonnes in previous year. Carry forward stocks are almost nil. Prices were trading at one year low of Rs.2000 per quintal during end of 2008 and lower estimates led to sharp rise in prices towards Rs.3000 per quintal in last 4-5 months. India imported more than 1.2 million tonnes of pulses in 2007-08 and failed to keep prices low as import prices ruled high. India annually produces about 13-14 million tonnes of pulses and this output almost stagnant for last 15 years. Consumption is rising every year with increasing population. India is largest importer of pulses and import about 2-3 million tonnes.
Rubber prices have gained by 23 percent in the last four months in domestic markets. Rubber global production is 9.89 million tonnes in 2007 compare to 9.68 million tonnes in 2006, while, consumption has increased to 9.73 million tonnes in 2007 from 9.21 million tonnes in 2006. India has produced about 8.25 lakh tonnes in 2007-08 compare to 8.53 lakh tonnes in previous year. Increasing demand for rubber in global markets and strong crude oil prices led to sharp rise in prices in recent past.
Potato prices fell from recent high of Rs.650 levels to Rs.450 with in span of one month with increasing arrivals. Output estimated at 28-29 million tonnes in 2007-08 higher from 25 million tonnes in previous season. Higher arrivals and lack of demand pulled down the prices of potato. Few state governments including West Bengal provided intervened in spot markets to support the prices.
Government measures
Government took various measures to control the rising prices of food commodities. It reduced import duty on refined edible oil from 40-45% to zero percent in March 2008 to control the rising prices of edible oils. India import about 50% of total domestic requirement and is price taker in global markets.
Price movement especially in Malaysia and US has direct impact on domestic markets. Edible oil prices have marginally come down in the past one month after Government reduced import duty on edible oils. Soy oil prices fell by Rs.150 per quintal with in span of one month. Apart from reducing import duties on edible oils, Government also directed states to strictly impose the stock limits on food grains and pulses.
Various states including Maharashtra, Andhra Pradesh and Delhi conducted raids on stock hoarders to bring out the excess stocks. This led to panic selling of pulses in spot markets and led to sharp fall in prices of most of pulses. Chana prices fell from recent high of Rs.3000 levels towards Rs.2300 with in one month period.
Impact of recent Government measures
In spite of taking these many measures, inflation remained high and touched 42 month high of 7.61% for week ending 26th April. Prices of most of agriculture commodities fell in the past few weeks as a result of Government intervention and also declining demand at higher levels apart from fall in prices of edible oils in global markets. However, higher prices of non-agriculture commodities like steel and cement remained high boosting inflation further.
Outcome of Abhijit sen committee report
Abhijit sen committee was constituted in March 2007 to study the impact of futures trade on agriculture commodity prices. it submitted report on 29th April 2008 to Government. It found no evidence of futures trade affecting the spot prices of agriculture commodities. His statements was, "I don't think one can say anything conclusively whether futures impacted prices," after submitting the report to Agriculture department. It recommended continuation of futures ban on wheat, rice, urad and tur, but not recommended any fresh ban on any commodities.
Is suspension justified?
Now big question arises as to what was the need for suspension of futures trade in four agriculture commodities when prices of edible oils have already eased and they are largely influenced by global factors rather than domestic factors.
It is strange that soy bean is left out from this list and Soy oil, a biproduct of soy bean has been suspended.
Chana prices have already fallen by 20% in last one month and what was the need to suspend futures rather than improving supply.
Potato prices are already trading at one year low and farmers are affected due to lower prices. Those who are demanding imposition of ban on futures trade in agriculture commodities are themselves providing support price to potato in West Bengal. Now it is very difficult to understand in what way Potato prices caused the inflation.
Volumes in rubber futures are almost nil in exchanges and there is no question of speculation increasing the prices with such low volumes. Also one should understand that Rubber and Soy oil are internationally traded commodities and domestic prices move in tandem with the international prices. Now it is important to watch for how long the disparity is maintained given the supply- demand mismatch across the world.
Various sections of people have criticized this decision of Government and real market players have lost confidence in futures trade. This includes representatives of various organizations of exporters, importers, processers etc. All these participants were using exchanges to hedge their positions. Now that in most of the rural areas NCDEX prices have become the bench mark, the farmer and small trader community will be deprived of better price discovery mechanism. Since Chana and Soy oil future contribute almost 35% of total Agri futures volumes, the future of Commodity derivatives market will be under threat.
Time and again suspension of future commodities trade to tame the domestic inflation will dilute the basic objective of introducing futures trade in India. As this is just a suspension and not a complete ban, the reintroduction may not result in good volumes since the participants have already lost their trust in Government. To conclude the government should focus more on ensuring enough supplies in the market with measures such as enhancing productivity, better cultivation practices etc.
Various sections of people have criticized this decision of Government and real market players have lost confidence in futures trade. This includes representatives of various organizations of exporters, importers, processers etc. All these participants were using exchanges to hedge their positions. Now that in most of the rural areas NCDEX prices have become the bench mark, the farmer and small trader community will be deprived of better price discovery mechanism. Since Chana and Soy oil future contribute almost 35% of total Agri futures volumes, the future of Commodity derivatives market will be under threat.
Time and again suspension of future commodities trade to tame the domestic inflation will dilute the basic objective of introducing futures trade in India. As this is just a suspension and not a complete ban, the reintroduction may not result in good volumes since the participants have already lost their trust in Government. To conclude the government should focus more on ensuring enough supplies in the market with measures such as enhancing productivity, better cultivation practices etc.
