After getting some insights from the commodities course made me to write this article. As myself being pro future trading I cannot resist people saying future trading leads to inflation. There is reason to it why I am saying that future prices don’t lead to increase in the prices of the commodities. We saw in the February 2007 that the future trading in the wheat was banned, even after the ban; the prices of wheat continued to rise sharply and reached $400/quintal. The reason for this abrupt increase in the prices was low output from major producers like US, Argentina, Australia and the subsequent ban on export of wheat by these countries. So I see no reason in banning wheat future trading as the price rise was due to lack of supply of the commodity to meet the rising demand.
The same is case with ban on trading of tur and urd which were banned for trading one month prior to wheat ban i.e. on January 2007, the production of tur in the year 2005-06 was 2.74 million tonnes while it was 2.31 million tonnes in 2006-07 how can decline in production match with day to day rising demand in this case the prices of the commodities are likely to rise.
In order to review whether futures trading really cause price hike government of India appointed a committee under the leader ship of Abhijit Sen. The committee had submitted its report. As per the report this committee had made an observation that food grains at no point accounted for more than 6% of total volumes of future trading in agricultural commodities. In fact the current volume of future trading in commodities in India is quite less than the international norms. More over the draft report of the expert committee on futures commodity trading, has recommended better regulation and participation by farmers in the commodities market even while saying that there was no evidence to suggest that futures trading stoked inflation.
As it was rightly by Mr. Bhashyam Seshan,CS (NCDEX) that exchanges as like NCDEX who trade in commodities futures are just playing the role of thermometer, they help us to know what is the current situation in the market which will further help us to decide what steps can be taken to avoid the foreseen price volatility. There is no use breaking the thermometer just because it is showing high temperature.
Future trading is just a price discovery mechanism and in order to improve this mechanism we need to standardise our local mandis which helps us to get the spot prices, it is very necessary that the spot prices should be arrived by fare means by suppressing the faulty practices of trade like hoarding or black marketing. In fact our government should take certain steps so as to involve the farmers in to this business so as to benefit directly from the benefits of future trading and secure his future position by mitigating the risk involved due to price fluctuation.
The same is case with ban on trading of tur and urd which were banned for trading one month prior to wheat ban i.e. on January 2007, the production of tur in the year 2005-06 was 2.74 million tonnes while it was 2.31 million tonnes in 2006-07 how can decline in production match with day to day rising demand in this case the prices of the commodities are likely to rise.
In order to review whether futures trading really cause price hike government of India appointed a committee under the leader ship of Abhijit Sen. The committee had submitted its report. As per the report this committee had made an observation that food grains at no point accounted for more than 6% of total volumes of future trading in agricultural commodities. In fact the current volume of future trading in commodities in India is quite less than the international norms. More over the draft report of the expert committee on futures commodity trading, has recommended better regulation and participation by farmers in the commodities market even while saying that there was no evidence to suggest that futures trading stoked inflation.
As it was rightly by Mr. Bhashyam Seshan,CS (NCDEX) that exchanges as like NCDEX who trade in commodities futures are just playing the role of thermometer, they help us to know what is the current situation in the market which will further help us to decide what steps can be taken to avoid the foreseen price volatility. There is no use breaking the thermometer just because it is showing high temperature.
Future trading is just a price discovery mechanism and in order to improve this mechanism we need to standardise our local mandis which helps us to get the spot prices, it is very necessary that the spot prices should be arrived by fare means by suppressing the faulty practices of trade like hoarding or black marketing. In fact our government should take certain steps so as to involve the farmers in to this business so as to benefit directly from the benefits of future trading and secure his future position by mitigating the risk involved due to price fluctuation.
Kalpakant C. Pawar
PGPABM-II
MANAGE.
19 comments:
Future Trading has been made the scapegoat in the present context of inflation. According to Tanmoy Chatterjee sir, future trading has no role in inflation. By controlling an instrument whose very purpose is to help the farmers in price realization, the government is doing a wrong thing
I also agree with your views sir as the volume of the commodities traded in commodity exchanges is very less as you said only 6%. And the price of the commodity in the market is decided by demand & supply mechanism.
Futures is not just about speculation about the prices the availability of the commodities is also important and this article justifies that ban on future trading on wheat,urd etc is a just a palliative here .We are missing out the bigger picture.
The current inflation is mainly due to the lack of supply as mentioned by Kalpakant Sir. By future trading farmers can get a good price for their produce and avoid the risk of price fluctuations. The govt. should encourage more and more farmers to be involved in future trading.
I agree with all of you but are we really prepared with complete deregulation in the agri sector ispite of knowing that commodity trading is still to be accepted by the different stakeholders of the sector. Abhijit Sen report might have cleared the future trading and even there was price rise after the ban on future trading, cannot be the only factors to decide that future trading is good or bad in agri commodities , freinds we need to learn the corelation and understand the different forces which are acting behind the present situation and what corelation they have amoung themseves.
Future trading not only help farmers in risk mitigation but also helps in deciding the cropping pattern.My colleague very rightly said that commodities traded on exchange are very few(6%) so the question is how it can impact the inflation?
price voltaility in agri commodities is mainly due to imbalance in supply and demand. this can be improve by increasing the area and productivity but not through banning the future trading
future trading helps in reducing the number of supply chain partners and help farmers in better price realization.
Going by all the comments i think every one is in favour of lifting the ban on future trading in commodities like wheat.But let me remind u people of the year 2007,it was bcos of the ban that india was able to sustain the price rise esp in case of wheat.In the current calender year also the wheat prices have been spiralling around Rs.1100 to Rs.1200(May 2008) subject to the seasonal variations which is perfectly normal. Also, when we compare the average wholesale price index of wheat, it has increased marginally from 232.1 to 233.1 between February 2007 and April 2008 as compared to the global wpi of wheat which has climbed by 16.7% during the same period.This comparision still sustantiates the trading ban on wheat by the indian govt as the price of wheat has had very less impact from the global prices in India.
For more info visit:
http://www.thehindubusinessline.com/2008/05/12/stories/2008051250430500.htm
I agree to what Adarsh says that WPI in this year has only increased marginally as against 16.7 % during same period a year before, Thanks to increase in production in the last year i.e. 2007 which has led to only marginal increase in the Average WPI of wheat, but the situation in 2006 - 07 was completely different as the production of the wheat had fallen in some of the major producing countries on whom India depends for its import of wheat which had led to increase in the prices in global as well as domestic market.So think it was not due to ban on trading that Average WPI of wheat was able to rise marginally.
Every one is commenting on price realisation for farmers. When 94.5 % of the farmer donot know the meaning of MSP. Till now most of the farmers are selling through shandies, even in the developed countries, farmers directly do not participate in futures market how honest is the government in asking the Sen panel, within days, to work on the measures to increase the Indian farmer’s participation in futures market
hello santosh , can you please mention the source of the data you have written that 94.5 % of farmers don`t know the MSP also .....if its correct then it is a high time for us ...............and there is a seroius correction is required.
I am enlightened to read so much about commodities and about the views held by kalpakant's article and some counterviews.
Let us draw some parallel with equities market. Equities market in India is almost mature now but very often we c analyst say that certain stocks are undervalued and certain are overvalued.And then market tries to correct itself. So some price aberration occurs for some time. In commodity market this might happen as well due to certain speculation. Govt. is worried that these speculation may unduly drive up prices causing widespread
inflation of food items(remember equity markets volatility does not directly have impact on non-participants,and participants to equity markets are one who are not worried about their daily bread)which will affect the common man directly.These speculation and views on market would happen on both the sides normally. Price rose due to supply side problems rather than speculation.Had there been a overproduction prices would have come down. I wont believe that annual average price of wheat should be Rs. 1000 or thereabouts.
We are so much used to lack of information that it becomes unacceptable for us that many buyers and sellers can come to a platform and discover prices. Future prices are a function of spot prices and other analysis. Just because one can even today get some wheat below MSP in certain mandis sd not make us believe that those sd be the price of wheat.
What sd have govt done: Rather than banning future trading on wheat govt. sd have promoted farmer groups to hedge and discover price for wheat on the exchange so that they gain and farming becomes attractive again.
I don't think we can correct commodity inflation without curbing demand and pushing supplies. But govts. are known to be shortsighted
and want to be seen to have acted.
I haven't read that exchanges anywhere in the world have contributed to inflation except that they would let u know quickly and accurately what is to happen.
Truly a Thermometer. A good one at that. Keep watching when this thermometer for wheat gets into action again????
If we go through a slightly deeper analysis, we will come to know that all the developed countries have used future trading in agri commodities as a tool for developing ag in their countries.It is just a matter of chance that wheat prices increased jst after these developements. In any case the experts committies involved do a great analysis for finding which commodity can be traded or not. Govt better should follow that instead of trying to divert the attention from the crux issues.
Dear manisha no sweeping statements plz.....comments with some data support plz.
Inflation and future trding are the two highly debated topics in any forum!
I feel it is a wrong notion that future trading in commodities is the root cause of inflation.
Futures trading in commodities has not been the cause for price increase in food items in India. Ban on futures trading cannot be a realistic measure to prevent inflation, because the price movement of a commodity is based on the demand and supply system. That means, where supply is lower, the deficit can be filled through imports. Infact reduction of duties can be a measure to encourage imports. Among the major groups, prices of primary articles led by wheat, pulses, fruits, milk and oilseeds posed upward pressures on inflation. The RBI report says wheat prices have remained firm on the back of low stocks and high international prices clearly indicating that price rise is mainly because of the low reserves and higher international prices. I say coz according to a front page article, the effective cost of procuring wheat domestically works out to about Rs. 11000 per ton, while the price that the government has paid by buying wheat abroad has worked out to about Rs. 13600 per ton, all inclusive!!!
I feel it is simply the lack of government control that has led to a surge in wheat prices. Still the government procures only about 1/4 of the total wheat produced in the country and the remaining is in private hands.
Hi every one, trying to pacify Santosh Kumar I would like to say that the price discovery we are talking about is not for the farmer but it is for the parties who want to hegde by engaging themselves in to future trading, it help to match the demand and supply side resulting in to price discovery. This price discovery is very much helpful for some genuine hedgers like that of OIL companies, ITC, Britania etc.
Dear KC Britannia so far did not hedge in futures market.
Hi Shashank please read the statement i have wrote "the meaning of MSP" and the data is from NSSO study.
The ban on future trading has a variable effect depending on the type of agricultural commodity.Most of the discussion done by us is on Wheat but if we take into account the 4 mnth ban on trading of chick pea, rubber, soy oil and potatoes,we will find that the commodities like rubber for which the production is very high in India, farmers hardly depend on futures for price determination as they get the highest farm gate prices in those commodities. If we take soy oil into considerations, its prices are governed by the global fundamental factors which includes the prices of palm oil also. Ban on future maynt be a solution but short term ban may act as a short term measure for controlling prices to some extent in case of sensitive commodities like wheat where even the political pressure starts building up.The situation became adverse due to production scenario of the major wheat producing nations in this case, but a short term ban could have been useful if other factors were constant.
Even the Abhijeet sen committee gave a report which says that unanimously it cant be said that there is no effect of future trading on the prices of agri commodities.
The reason of the political comment made by me earlier on this blog was that the common notion of government that CACP, FCI and PDS are the main pillars of the commodity market will be shaken if the futures become the price determination factor in the country. WHAT WILL BE THE USE OF GOVT appointed CACP(commission on ag cost and prices)if price discovery happens elsewhere and that is the reason for making the Futures in agri comm futures an scapegoat.
Great Going Guys & girls. This piece of effort is the true spirit of Blogging. Keep it up. Post more such type of articles. I would agree more with adarsh that do not make sweeping statements untill and unless backed by data. This will improve the credibility of your blog. also ensure the first post itself should be loaded with data and should involve good amount of research. Once a week a post like this makes your blog hot.
Great going and All the Best.
Prof. Sanjeev Varshney
XLRI Jamshedpur
India
Post a Comment