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Futures ban more a bane than balm

Futures ban more a bane than balm
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First Published: Sun, Jun 08 2008. 11 39 PM IST

Updated: Sun, Jun 08 2008. 11 39 PM IST
Indore: At the National Board of Trade (NBOT), one of India’s leading commodity exchanges, the shrill voices that call out the daily bids are laced with an undertone of uncertainty.
The traders have already had some of their business nipped—futures trading in soya bean oil. And, since that decision nearly two weeks ago, they aren’t so sure whether soya bean, from which the oil is extracted, will be spared.
In Indore’s sleepy Malviya Nagar where the exchange sits, the air is thick with speculation that some of the bigger commodity players are already looking at taking their business overseas, while others say illegal trading in soya bean oil is slowly taking root.
Facts About Futures (Graphic)
NBOT has a lot at stake—it is the bastion of trade in soya bean oil and seed. But, its position now looks shaky after the government, stirred by inflation which has touched a 44-month high, slapped a ban on futures trading in commodities such as chana, rubber, potatoes and soya bean oil. But, early indicators are the move may not help.
A futures contract is an agre-ement to take or make delivery of a specific quantity of a commodity on a particular date at a price decided at the time of striking the deal. Betting prices will be higher in the future st-oke expectation of a price hike in the commodity. Globally, traders argue, prices are driven by pure demand and supply, and not just speculation.
Next on hit list? Workers unload sacks of soya bean at Indore’s Sanyogitaganj Mandi. (Shankar Mourya / Mint)
Since NBOT traded only in soya bean oil, its traders were out of their jobs on the day of the ban. But, India’s commodity market regulator, Forward Markets Commission, allowed it to trade in rapeseed, mustard seed and oil, crude palm oil, and soya bean instead.
“While we have begun futu-res in soya bean seeds, we are waiting for the NBOT board to clear trading in other commo-dities. The soya bean oil ban has already dropped the exch-ange’s trading volume by 50%. If a ban is imposed on soya bean as well, it would mean virtual death for the exchange,” said a senior NBOT official who didn’t want to be named.
Around 4km away, farmers in Chawni grain wholesale market were busy selling their last lots of soya bean before the end of the season. “I don’t understand what the futures market is all about, but there are price indicators we farmers are getting from the mandi (market), which I am told are based on prices discovered by some (futures) exchanges,” said Ganesh Patidar of Sindora village, 10km from Indore. Patidar, who grew 200 quintals of soya bean on 35 acres, chose it over onions and potatoes as he gets more money for the soya crop. Though he doesn’t trade in futures, he takes cues on pricing in the mandi’s spot market, which is guided by futures.
There are others who are in the same boat. Farukh Patel, a farmer from Gunavad village in Indore district made use of price indications that he got from the mandis. “Today, I sold soya bean at Rs2,000 a quintal. In October, I sold it for Rs1,400,” said Patel. Though unaware of how futures pricing works to influence mandi prices, Patel said he asks ahrtiyas (traders or middlemen) in the local mandis about the spot prices. These middlemen are tuned into the futures prices.
Another farmer, Dwarka Prasad Patidar, who grew soya bean on 40 acres in Khargone district of Madhya Pradesh, is watching price movements. “I have sold a few lots at lesser prices. I will wait for prices to cross Rs2,300 a quintal before I will sell rest of my produce.”
Soya bean oil prices have actually risen by 5-6% since the ban was imposed in the second week of May. Prices of refined soya bean oil went up by Rs350 to Rs6,200 a quintal some 10 days after the ban. At the time of the ban, retail prices had dropped by more than 20% since March as there wasn’t enough demand.
“The ministry of consumer affairs was not very convinced about this ban, but since the finance ministry is in charge of controlling inflation, it thought it might help. We had to go along with that,” said a senior government official closely related with the ban on agricultural products who did not wish to be identified.
The ban has also hit brokers and oil processors. Though most have shifted to soya bean, they say the ban will lead to illegal or “dabba” trading, and large players will switch to overseas trading platforms such as the Kuala Lumpur Commodities Exchange or the Chicago Board of Trade.
Ruchi Soya Industries Ltd, Cargill India Private Ltd, ITC Ltd, Adani Wilmar Ltd, KS Oils Ltd, Gujarat Ambuja Exports Ltd, the Dainik Bhaskar Group and a few other firms control more than 50% of soya bean oil trade in the country. They also have the resources to easily switch to overseas exchanges.
“Any major player will like to hedge its position and manage its risk. Although we have not yet gone to overseas exchanges, we are actively thinking on those lines,”a senior executive at Dainik Bhaskar said.
“If these firms start trading on overseas exchanges, NBOT will find it difficult to bring them back even if the ban is removed,”?said?the NBOT official.
“The government has not been able to achieve anything by banning (futures trade on) soya bean oil. Rather, prices have increased and there are chances the trade will shift to the ‘dabba’ market, fuelling more speculation,” said a broker who did not wish to be identified. While he has shifted to soya bean, his margins have fallen six times.
Oil processors agree. “Once ‘dabba’ trading perpetuates, it will be very difficult to control it because the current forward markets regulation Act is not strong enough to control it,” said Rajesh Agrawal, spokesman of the Soybean Processors Association of India. It’s because the grey market operates through word of mouth and private contracts between individuals are off market and out of the regulatory ambit.
“Dabba” trade is also expected to mislead farmers because, as price indicators, these are easier to manipulate.
It seems the ban on futures trading of commodities, while here to stay, will not be able to prevent farmers such as Patidar from holding back for higher prices.
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First Published: Sun, Jun 08 2008. 11 39 PM IST