Data shows decision to ban futures contracts in seven agri-products has very little rationale
The ban on other commodities—moong, paddy, wheat—is quite surprising as the price changes over the last 6 months or so have been modest and, more importantly, the products are not ‘liquid’ in the futures market.
The banning of futures contracts in seven products is a major setback to commodity derivative trading in India. This comes at a time when the industry was witnessing various innovative products, including options on goods (akin to the MSP), as well as new players in the market.
High food inflation is the reason proffered; however, data doesn’t supported this. The edible oil complex and pulses have come under the ban; the price movements are interesting. The derivative trade in chana was banned in August, while the ban on mustard came in October.
Two primary questions arise here: Whether prices have increased disproportionately in the market and whether the ban on futures trading in chana and mustard helped to bring down prices.
A third question, pertaining to a broader concern, is how long can we insulate ourselves from global influences when it comes to commodities.
The accompanying graphic shows that after the ban on chana, the prices of chana dal products in retail markets did not go down; they were in fact slightly higher in the following months. In the case of mustard, the retail price of oil and seed remained elevated post the ban. The reason is not hard to guess. The global prices of edible oils have been rising sharply since last year. The demand-supply mismatch has been essentially due to the opening of economies, leading to higher demand from hospitality, airports, offices, etc. Further, higher freight costs and supply bottlenecks including logistics have pushed up prices. India imports 55-60% of its edible oil requirement and hence is a ‘price-taker’. As international prices increase, domestic prices must also rise in consonance.
The prices of edible oils have increased sharply in the last year. The domestic prices of soy oil , crude palm oil, and mustard oil have increased by 42.5%, 31.7%, and 41.7%, respectively. When the inflation in commodities is global, and India is a price-taker—as the largest importer of the product—imported inflation can’t be escaped. Futures trading, being a reflection of these market conditions, would provide an early warning signal to all the supply chain participants and help in hedging. Now, this tool will not be available and higher risk has to be carried on the books.
The ban on other commodities—moong, paddy, wheat—is quite surprising as the price changes over the last 6 months or so have been modest and, more importantly, the products are not ‘liquid’ in the futures market. The accompanying graphic gives the trends in movement of prices at the retail level (as per the department of consumer affairs). Wheat atta has been used instead of wheat as this is what is provided by the department—as is the case with rice as price of paddy is not provided. As can be seen, the prices have largely been constant in these six months.
With state elections around the corner, there is definitely pressure from some groups to ban commodity trading as food inflation is high (when it comes to edible oils). However, for pulses, a one-year growth in prices shows a decline for both chana dal (-0.1%) and moong dal (-4.1%). There is no justification for the ban when prices have been steady or declining!
Bans on trading in agricultural products in the derivative market are not new, and, hence, agri-products are risky from a commercial perspective for any exchange. Given the socio-political environment, such action is always on the anvil. But, banning futures trading drives back the market significantly. First, the farmers are prevented from getting better prices. The exchanges along with SEBI have managed to involve farmers at the micro level which gets vitiated now. Second, corporates hedging their price risk will now suddenly be at a loss, especially for oils, given it is an international phenomenon and hedging was the only way out. Last, all future reforms will be in jeopardy on account of such actions. The government should reconsider these bans and end these soon, perhaps after doing an internal analysis on the lines suggested here.
The author is Independent economist and author of Hits and Misses: The Indian banking story