Stable policy a must for futures in agricultural commodities

Is there a concerted effort to scuttle futures trading in agricultural commodities? It seems so going by a spate of recent media reports that have sought to raise the pitch of debate about the desirability of commodity futures especially targeted at agricultural products.

Trade associations and chambers of commerce have flooded the Government with representations seeking a curb on speculative activity in particular and derivatives trading in general.

Vociferous opposition to futures in agricultural commodities seems to have unnerved New Delhi that is already fighting a battle against food inflation. Many have overlooked the fact that some of the essential commodities such as chana and mustard whose prices have risen sharply in recent weeks are commodities in short supply.

For instance, at 173 lakh tonnes, Indian pulses production in the current year 2011-12 is at least 10 lakh tonnes lower than in the previous year.

Specifically, chana or gram crop this year is 7.7 lakh tonnes versus 8.2 lakh tonnes last year. Some private estimates place the crop even lower. Same is the case with mustard crop which too has suffered. It is about seven lakh tonnes lower this year as compared with last, whether by government estimate or trade estimate. Some experts believe the crop is more than 20 per cent lower than official crop size of 75 lakh tonnes.

More importantly, the domestic market for two crops – oilseeds and pulses – is strongly correlated with international markets because of significant import intensity. In case of oilseeds, our import dependence is as high as 55 per cent of domestic requirement in oil terms. As for pulses, the shortfall of about 30 lakh tonnes representing close to 20 per cent of domestic production is made good through imports.

In addition to high international prices – for instance, of oilseeds and vegetable oil – a weaker rupee has made imports so much more expensive. These are extraneous factors over which no one has any real control.

Despite being an industrial raw material and commodity of little consequence for the aam aadmi (common man), futures trading in guar gum and guarseed has been banned. Because the commodity has excellent export potential, processors and exporters today have no way to manage their price risks.

The policymakers have also trained their attention on food crops such as chana, mustard, soyabean and so on. This follows strong representations sent to the Government by the processing industries. The Union Minister of State for Food and Consumer Affairs, Prof K.V. Thomas has asked advisory panels to be set up to examine all issues including aligning the physical and futures markets.

On its part, the regulator of the commodity futures market – Forward Markets Commission – has initiated a comprehensive exercise with intent to reform the market as deemed necessary.

It is not just the government, but even market participants have begun to be deeply concerned over the sudden spurt in opposition to agricultural futures. Some of the physical market players who have finally realised the advantages of hedging their price risks in the futures market have now been left wondering about risk management and importantly, stability of Government policies.

The unseemly uncertainty that has gripped the country's agricultural commodities futures market is unhealthy. New Delhi must make its position clear forthwith. It is important to realise that futures trading in commodities commenced in this country 10 years ago with the object of 'price discovery' and ‘price risk management' specially targeted at primary producers (growers) of agricultural crops and processors of these crops.

However, futures in agricultural commodities have been relegated to the background because of policy uncertainties and failure to address structural issues of crop production. This must change.