Hedging against a major risk--the monsoon

Hedging against a major risk--the monsoon
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First Published: Fri, Jun 26 2009. 12 50 AM IST

Updated: Fri, Jun 26 2009. 12 50 AM IST
With the delay in the monsoon, one would expect commodity futures to go through the roof, right?
Well, if you were to take Futexagri, the agricultural futures index of the National Commodity and Derivative Exchange (NCDEX), it’s actually lower now than it used to be in April or May.
The index closed at 2,159 on 24 June, while it was at 2,182 on 24 April, when there were no worries about the monsoon. This is strange, considering not only the dire warnings of prices rising as a result of the delayed rains but also the continuing rise in the prices of primary articles as seen from the Wholesale Price Index.
The truth is, as NCDEX chief economist Madan Sabnavis says, the futures index is computed on the basis of commodities traded at the NCDEX, and the government has banned trading in a number of commodities, such as tur, urad and sugar. The futures index is thus not representative of the bulk of the agricultural activity in the country.
Much has been written of how India could be an ideal market for weather derivatives, but current Indian rules do not allow such instruments.
The net result is that market participants are unable to hedge what is admittedly the biggest risk in the agricultural sector—the monsoon.
Sabnavis says that there’s a crying need for such an index and that the NCDEX indices have on several occasions demonstrated predictive power about a particular crop. He says NCDEX had written to the government pointing out that sugarprices could rise, based on the sugar futures traded at the exchange. But the response of the government was to shoot the messenger and ban futures trading in sugar.
There are, however, other factors that seem to be weighing on the futures prices of some commodities. For instance, stock and commodity brokerage Sharekhan Ltd points out in a report that while “a slight improvement in demand and positive sentiments due to a delay in the monsoon have cushioned the price” of chana, “with a bumper crop this year, we expect the upside to be capped”. Similarly, Anagram Research points out that while the guar seed July contract has seen a recovery, the bearish factor is that the “global economic slowdown has led to a drastic fall in exports of guar gum.”
In other words, high stocks and lower exports could cushion prices. But that doesn’t alter the need for a tradable index that could hedge against monsoon risks.
Write to us at marktomarket@livemint.com
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First Published: Fri, Jun 26 2009. 12 50 AM IST