The Hindu Business Line : Govt must focus more on non-price, non-trade initiatives

It is unclear how the Government would manage the risk that can potentially arise if state-run agencies are allowed to trade commodity futures in the name of price risk management.

Mumbai , Dec. 4

THERE seems to be a good deal of confusion and lack of consultation or organised thinking among various constituents of the Government in the matter of futures trading in foodgrains. What else can explain incongruent views expressed in the last few days.

What is clear is, of course, that many within the Government and outside think futures trading is a magic wand that will solve all the problems of the foodgrains sector. Far from it. This line of thinking clearly betrays a lack of understanding of the market's rationale and dynamics.

Recently, the Minister for Food and Agriculture asserted that his ministry was in favour of state-run agencies hedging the price risk in international exchanges.

He wants this activity to become a regular feature. Mr Sharad Pawar believes that hedging would safeguard the interest of consumers.

Sometime in September, concerned over apprehensions of shortage and rising domestic wheat prices, the Government asked Food Corporation of India (FCI) to purchase wheat futures on the Chicago Board of Trade. The purchase of about 8 lakh tonnes January 2006 contracts has since been settled, it is believed.

Only a few days earlier, the Chairman and Managing Director of FCI was reported to have stated that surplus fine cereals with the corporation would be traded on the domestic futures exchanges for better price realisation.

FCI was reported to be in talks with two nationwide online exchanges for the purpose.

It is natural that the exchanges on their part would only be too happy over the development because they are desperate to attract higher trading volumes and FCI's exposure to foodgrains is rather large.

However, NCDEX's Chief Executive Officer put the matter in perspective and confirmed to this correspondent that the idea was to facilitate FCI to sell surplus physical stocks of foodgrains by using the national reach of the exchange platform and give delivery, and not do paper trading with the intend to settle the trade with price difference.

Obviously, different people have different perceptions of the same issue. A lot more thinking needs to go into the issue of Government-run agencies entering commodity futures trading. The move is fraught with severe pitfalls.

It is necessary for the Government to segregate the sovereign functions of FCI from commercial functions (Please see Business Line dated December 2, 2005 - Allowing FCI to trade surplus grains on the futures exchange not desirable).

Policymakers must train their attention to ways and means of reducing the extraordinarily large exposure that FCI has to the grain market. There is need to further rationalise procurement and distribution so as to reduce costs.

Price changes in the physical market are based on demand and supply fundamentals.

Futures trading cannot substantially alter the demand-supply fundamentals, nor can it prevent glut or shortage of a commodity.

It is unclear how the Government would manage the risk that can potentially arise if state-run agencies are allowed to trade commodity futures in the name of price risk management.

It is imperative that the Government concentrates on strengthening the physical side of the market.

The Ministry of Agriculture must ensure sustained growth in agricultural production and that large annual fluctuations in output are minimised.

A sustained growth in foodgrains output over a period of time by itself would help reduce the role of Government parastatals like FCI.

If the Government is serious about protecting the interests of both farmers and consumers, it must engage less in tinkering with prices and markets.

It must focus on non-price and non-trade initiatives that would lay down a clear path for sustained growth.

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