The agricultural commodity futures markets in India were dealt another severe blow, thanks to the government’s decision to ban futures trading in four more commodities. There was hardly any pretense that the move was not a political one. Finance minister Palaniappan Chidambaram told Bloomberg a few days prior to the ban that the government may suspend some contracts because of political pressure to see “if it has any impact at all on inflation.” Only a few days before the ban, the Abhijit Sen committee submitted its report on a study whether futures trading contributed to the rise in agricultural commodity prices. Regrettably, the opportunity to set the record straight was completely missed. The committee came to no conclusion—in what is probably a first, four of the five committee members submitted supplementary notes to the report, signifying the extent of disagreement within the group.
Much of the press coverage centred on the fact that the committee hadn’t found any evidence to link futures trading with rising agricultural commodity prices. But it’s naïve to think that the committee gave futures trading a clean chit. It only says that “the current evidence available does not provide any conclusive evidence about whether there is any causal relationship between futures trading and rise in prices of the agricultural commodities”. It also says that the period during which commodity futures markets have been in operation is much too short to come to a conclusion. In other words, the committee report seems to suggest that there is still the possibility of a link and this may come up in the future if a study is done over a longer period.
Market participants are peeved that the committee took as long as 14 months to come up with these elementary findings. “One could have excused the committee if it had taken two months or so for such a report. But to come up with no conclusion after 14 months is unacceptable,” says a commodity exchange official. These views were echoed by the head of one of the country’s largest commodity brokers: “It’s just hogwash. The markets were even more nascent when the committee began its study. What’s the point of taking another 14 months to say that the markets haven’t been in operation for a sufficient period?”
But the saddest part is that the 55-page report doesn’t answer the elementary question whether commodity futures markets were manipulated, and if it led to a resulting rise in spot prices. The report speaks volumes about the trend in prices pre-futures, post-futures and even post the ban on wheat, urad and tur futures; the various fundamental reasons which caused prices to rise such as shortfall in supply; and the fact that the pre-futures period was one of low prices. But there’s no attempt to determine if manipulation of the futures market caused a disproportionate rise in spot prices—if there were instances of hoarding or collusive trading. Susan Thomas of the Indira Gandhi Institute of Development Research says that the report reads like one on agricultural pricing behaviour, rather than one which investigates the linkage between agricultural spot and futures markets. It does not answer basic questions such as “Are the commodity futures markets efficient?” and “Were commodity futures markets in urad and wheat manipulated by traders”? A study over a 14-month period should have easily dealt with these questions and put speculation on these matters to rest. Instead, we have a report that reeks of ambiguity and contradictions, reflecting the disagreement within the group. Experts also say that nothing much could be expected from a committee appointed by the government, which is uncomfortable with high commodity prices and is looking for excuses to show that the prices reflected on the futures exchanges are not right.
To top it all, the committee’s suggestions about the importance of more efficient spot market and of an empowered regulator are nothing new. These have been talked about for the past few years. It’s high time the government worked to implement these, rather than blame futures trading without reason.
Prospects of a commodity spot exchange
One major reason for the backlash against commodity futures trading is the transparency that comes with it. When the government fixed a minimum support price of Rs850 per quintal for wheat last year, the futures market was quoting a price of Rs900-1,000. As a result, many farmers sold their produce in the open market and the government’s procurement fell short last year. From the government’s point of view, the price transparency was clearly not desirable. Another group that doesn’t like transparency is an existing cartel of traders in a commodity, which benefits from the inefficiencies in the system and the absence of a widely quoted price of the commodity. It’s not very surprising, therefore, the attempts by futures exchanges to set up a nationwide spot exchange for commodities has been facing rough weather. The spot exchange format lacks the leverage of the futures market and should be less prone to manipulation (if that’s the worry about futures exchanges), but it performs a similar function of price transparency.
No one will openly speak against price transparency in farm goods, because it helps farmers get the best price. An exchange official says that considering the obvious benefits to farmers, states should have been queuing up to get the spot exchange format in their jurisdictions. The fact that they are instead taking forever in giving clearances suggests that that transparency is not desirable in India.
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