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Mumbai: The government has asked the Securities and Exchange Board of India (Sebi) to ban sugar futures trading as it does not want a few traders and speculators setting prices in a year when there is likely to be a shortfall of the commodity.

According to three people familiar with the development, the government is concerned that futures market aren’t setting the correct price signals.

“There is an expected shortfall of sugar stocks in this financial year. There is a consensus emerging that the futures trading in sugar be banned to address the rising prices and expected sugar stock shortfall," said a financial ministry official, one of three people, on condition of anonymity.

According to the preliminary estimates of the Indian Sugar Mills Association (ISMA), national sugar output will fall to 23.26 million tonnes this financial year, down by 7.3% from a year ago.

In its preliminary estimates for the 2016-17 season, ISMA, the apex sugar industry body, has said that little less than 5 million hectares have come under sugar cane cultivation in the country. This is 5.5% less than the area under sugar cane in 2015-16—approximately 5.3 million. ISMA expects a national output of 23.26 million tonnes (mt) of sugar this season, down from 25.1 mt in 2015-16.

Sebi has replied to the ministry, saying the lack of liquidity and depth in the sugar futures market are partly due to a government rule which caps stock holding by dealers at 500 tonnes.

“The erstwhile Forward Markets Commission (FMC) and Sebi have been telling the government that the stock limit of physical market should not be made applicable to the accredited ware-houses of the commodity exchanges," said the third person quoted above.

According to commodity market regulations, the position limit in near month sugar contracts is 5,000 tonnes, 10 times the government cap. After this stock limit was imposed, sugar future volumes fell from as high as 53,000 tonnes a month to an average 19,000 tonnes in May and June.

“With a stock limit of as low as 500 tones, it is natural that the market will remain shallow and the producers will find it difficult to participate in the market. Hedgers and other actual users are also not adequately participating," said the head of a commodity brokerage.

“Instead of banning the futures, the government should focus on bridging the supply and demand gap," he added, on condition of anonymity due to sensitivity of the subject.

This would be the second agricultural commodity that would face a ban due to high prices since Sebi took over as commodity regulator in September last year. Sebi in June banned Channa contracts on account of high prices of pulses.

Another head of an international commodity brokerage says that, “the price signals emanating from the futures markets help in fine tuning the policy measures. So banning them would actually give rise to more middlemen."

“Before finalizing any decision, the finance ministry may have another round of meetings with ministry of food & civil supplies, ministry of agriculture and Sebi," said the ministry official quoted earlier in the story.

The rising prices of sugar have made sugar company stocks a punter’s favourite this year. Of the 100 top gainers on the BSE year-to-date (YTD), 19 are sugar stocks, and of these, 15 have more than doubled gains so far in 2016.

Futures price for sugar, set for delivery in October is 0.35% down at 3,688 after opening firm at 3,713 on the National Commodity and Derivatives Exchange (NCDEX). However, December sugar contract was three rupees down at 3,721. Spot price for sugar in various states is currently trading between 3,500 to 3,900.

Meanwhile, considering the high prices in sugar contracts the agricultural bourse,NCDEX on Wednesday increased the margin requirement.

“Additional margin of 5% [in cash] on both long and short side and a special margin of 25% [in cash] on long side [in addition to the existing special cash margin] will be imposed on all running contracts and yet to be launched contract in sugar," said NCDEX in a circular issued on Wednesday.

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