The release of the Economic Survey 2023-24 has renewed discussions about India’s agricultural futures market, highlighting its essential roles in managing price risks and aiding in price discovery for farmers, Farmer Producer Organizations (FPOs), and other market participants. Agricultural commodity prices are closely linked to information about their fundamentals and futures prices, provide valuable signals that enable participants to make informed decisions regarding production, consumption, and investment.

However, India’s agricultural futures market, intended to support farmers, FPOs, and traders, has faced challenges due to the Government’s repeated regulatory interventions. To maintain stable food prices, the Government has imposed multiple bans on trading key agricultural commodities such as potato, channa, wheat, and soybean over the past decade. These suspensions, starting with potato in 2014, have persisted, with a recent extension on seven key commodities in October 2023. The Government justifies these bans as necessary to prevent artificial inflation through hoarding and speculative trading. 

Sen committee report

Despite the Government’s intentions, various reports and studies, including those by the Abhijit Sen Committee (2008), the Parliamentary Standing Committee on Food, Consumer Affairs, Public Distribution (2011), and the Reserve Bank of India Annual Report (2009-10), have consistently indicated that commodity prices in India are more influenced by fundamental factors such as supply-demand gaps, import dependency, and global price movements than by futures trading. Moreover, recent research reports also show that the number of FPOs actively hedging on trading platforms has significantly decreased since the suspension of these key commodities. 

Against this backdrop, the Centre of Excellence in Commodity Markets at the Institute of Rural Management Anand (IRMA) conducted an impact study involving five FPOs and eight value chain participants (VCPs) such as traders and processors, primarily dealing with soyabean and mustard across Rajasthan and Madhya Pradesh. The study aimed to evaluate the consequences of suspending these commodities from the derivatives market on the overall business output of these FPOs and VCPs. 

Shift FPOs’ focus

The study revealed that the suspension of derivative contracts has significantly affected FPOs dealing in the suspended commodities. These FPOs, which previously used futures markets to hedge against price risks, are now facing reduced market participation and a decline in warehouse usage. This has forced FPOs to abandon their primary activity of trading farmers’ produce, fearing losses. As a result, these organisations have shifted their focus to other activities, such as selling agricultural inputs, providing small loans, renting agricultural equipment, and charging commissions for connecting farmers with better buyers than traditional mandis. This shift threatens the viability of FPOs and undermines the development of agricultural infrastructure and the broader agri-commodity ecosystem in India. 

Farmers associated with these FPOs are now left to bear the full burden of price risk, reducing their bargaining power and incomes as FPOs can no longer hedge using derivatives. Interviews with FPOs that previously hedged in futures markets reveal that the suspension has left them without effective means to manage price risk, pushing them out of the commodity derivatives market altogether. Additionally, before the suspension, commodity exchanges played a vital role in price discovery. After the suspension, however, large traders and processors have taken over the market, becoming the main influencers of prices, which smaller traders and farmers are forced to follow. 

Empirical study

The impact study also found that other participants in the commodity value chain place more trust in commodity exchanges for ensuring fair practices and timely payments. This reliance on exchanges was crucial in avoiding exploitative practices by private traders or processors. 

Another empirical study conducted by the Centre using price data from 2010 to 2024 assessed the impact of the Government’s suspension of commodity futures trading on mustard seed and soyabean prices. The study found a strong link between futures and spot prices, with spot prices often following changes in futures prices. This relationship helps maintain market balance and ensures that prices reflect true supply and demand. The study concluded that the ban, intended to control price increases, may have had the opposite effect, leading to higher prices and greater market instability. Instead of stabilising prices, the suspension disrupted the natural price discovery process, making it harder for market participants to manage risks and make informed decisions. 

Summing up

In summary, the government’s ban on commodity futures trading, intended to control price increases, appears to have resulted in higher prices and increased market instability. Rather than stabilising the market, the ban disrupted essential market mechanisms, making it more challenging for FPOs, farmers, traders, and processors to manage risks and make informed decisions. Research suggests that these suspensions did not address the fundamental drivers of commodity prices, such as supply and demand forces, indicating that the government’s interventions may have inadvertently increased market volatility rather than stabilising prices.

As highlighted in the Economic Survey 2023-24, the role of FPOs is crucial in helping farmers navigate these challenges. Improving the skills and financial literacy of FPOs regarding futures markets could enable them to better support farmers in taking advantage of opportunities in the agri-commodity sector. However, the history of suspensions shows that such bans can have long-lasting effects on different commodities, making it essential for stakeholders to carefully evaluate past interventions. The Economic Survey rightly suggests that once regulators set clear guidelines on commodities for trading, they should maintain a stable policy with minimal interventions. As the market deepens over time, outright bans on futures trading may no longer be necessary unless there is strong data-backed evidence that such trading increases price volatility. Crafting strategies that foster market stability and growth will be key to the long-term sustainability of India’s agri-commodity ecosystem. 

(Dr Arrawatia is professor, Lakshmi Padmakumari and Sumit Sharma are Research Fellow, Institute of Rural Management Anand (IRMA))

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