New Delhi: What is stopping Food Corp. of India Ltd (FCI) from selling its ample wheat stocks in the open market and buying futures contracts to meet its distribution commitments in the months ahead?
Or, for that matter, what is keeping the food procurement agency from selling grain futures internationally, knowing that a bumper crop means exports have to be pushed?
Fear of political criticism, a lack of domain knowledge, illiquid futures markets, potential for the formation of cartels, and a lack of reforms in the commodity derivatives market, experts say, are inhibiting FCI and other procurement agencies from using the tool of grain futures to manage stocks and hedge against risks.
FCI chairman and managing director Siraj Hussain did not comment for this report. His predecessor, Alok Sinha, said playing the futures markets had never been an option to manage grain stocks.
Storage woes: Wheat stocks at a mandi in Haryana. Wheat production was a record 252.56 mt in 2011-12, up from 241.56 mt in the previous year. That achievement is tempered by the fact that a sizable portion of the country’s wheat stocks lie in the open. Photo by Ramesh Pathania/Mint.
“Futures is a western concept. It is not in tune with Indian reality,” said Sinha. “There was never any proposal for such a thing.”
The possible use of futures trading instruments to manage food stocks and hedge risks has to be seen in the context of India’s overflowing granaries.
India’s wheat stocks on 1 May were 38.2 million tonnes (mt), more than nine times the official buffer target; rice stocks were 33.3 mt against a target of 12.2 mt. Wheat production was a record 252.56 mt in 2011-12, up from 241.56 mt in the previous year. That achievement is tempered by the fact that a sizable portion of the country’s wheat stocks lie in the open, covered with plastic sheets, and some of the carry-over from the last few years is rotting.
In the local market, the price of wheat has slipped to Rs 1,200 a quintal, against the minimum support price (MSP) of Rs 1,285, and in the international markets, Indian wheat is overpriced by $70-100 per tonne compared with wheat from other exporters.
The situation could have been better managed using grain futures.
And it’s not as if FCI is totally unfamiliar with the futures market.
About four years ago, when India faced a shortage of wheat and it became reasonably certain that imports would be necessary, the government bought wheat futures on the Chicago Board of Trade (CBOT) in a one-of-a-kind deal, people familiar with the situation said on condition of anonymity. Top secrecy was maintained on the purchase.
“I got to know of it and I wanted to report it, but I was sworn to secrecy,” said an editor with an economic daily who didn’t want to be named. “The contract on CBOT was for only 1 mt. Ultimately, they did not take delivery, but they successfully hedged themselves in a crucial year when wheat had to be imported.”
A former official in the food ministry who was close to making the deal did not want to comment on it. Experts said they did not expect hedging mechanisms to become part of mainstream operations at food procurement agencies.
“Ideally, derivative markets are an effective way to hedge upside and downside risks, but India is a different story—the will and the appetite for futures is not there,” said Shubhada Rao, president and chief economist, Yes Bank Ltd.
Big structural changes would be needed in the futures market before grain procurers set foot in it, starting with the amendment of the Forward Contracts (Regulation) Act of (FCRA) 1952, experts said.
The Forwards Contracts (Regulation) Amendment Bill of 2010 speaks of strengthening the forward markets regulator, corporatization and demutualization of existing commodity exchanges, and permitting trading in options, among other reforms.
“Where is the depth in the market? There is hardly anyone trading wheat except for a few millers,” said Kishore Narne, senior vice-president, Anand Rathi Commodities. “The FCRA has to be amended. Options have to be allowed. Financial institutions and banks have to be allowed to trade in the futures market.”
The futures market, opened up in 2003 after a three-decade ban, hasn’t been able to shed its image of a price manipulator. Facing criticism over rising inflation, the government banned trading in wheat futures overnight in 2007, reopening it only two years later.
The market is small. On National Commodity and Derivatives Exchange Ltd, 20,113 contracts of wheat were traded in May, valued at Rs 245 crore, data from the exchange show. A year ago in the same month, 18,504 contracts were traded, valued at Rs 226 crore.
Buyers of wheat such as biscuit and flour makers and big companies such as ITC Ltd and Britannia Industries Ltd use the MSP set by the government as a benchmark. In a year of surplus production, they wait for government agencies to complete their procurement for the public distribution system before they step into the market to buy at lower prices.
There is no reason to believe the same advantage cannot be had on a futures platform.
The government’s pre-determined prices may enable buyers to price down the contracts as they would know the minimum support price is usually raised every year to give the farmers an advantage, and may thus be artificially high, according to Madan Sabnavis, chief economist, CARE Ratings.
“With the government declaring an MSP, where is the scope for price discovery?” asked Sabnavis.
The way forward for FCI may be to liquidate some of its wheat stocks to pay people enrolled under the rural employment guarantee scheme, and sell some of the rest in the open market at a fixed price, said G. Chandrashekhar, a columnist for Business Line newspaper.
“FCI discharges a sovereign function. It should not be turned into a commercial transaction,” Chandrashekhar said.
Another way forward may be to offer an MSP for other essential crops such as pulses, which could persuade farmers to diversify their crops and decrease their dependence on the production of wheat and rice, other analysts said.
“There needs to be a change in the overall food policy. They need to fix the limit to overall procurement,” said CARE’s Sabnavis. For now, futures trading may be anathema, but FCI has already been using an electronic platform for selling some of its wheat stocks on a spot basis. Last year, it sold 148,000 tonnes of wheat on the National Spot Exchange, promoted by Financial Technologies (India) Ltd, and this year the quantity could be higher.