The Hindu Business Line : Sticking to the basics

Commodity futures regulator Forward Markets Commission (FMC) is treading on slippery ground; and there is apprehension the agency may be overstepping its brief. Admittedly, there is all-round concern over the slowdown in futures trading volumes since the beginning of the year. Quite apart from governmental restrictions that have stymied trade, the voracious risk appetite of the initial phase (2003-2006) may have waned because of losses suffered by many market participants. Even as those with genuine underlying exposure to commodities (bulk producers, processors, large consumers, trading houses and physical market traders) are keeping off this market or are reluctant to enter, there is a move to lure primary producers of agricultural commodities, that is farmers, into a market about which they understand little. In convening a meeting of banks, socially-responsible corporates, co-operative marketing federations and non-governmental organisations (NGOs) and suggesting that aggregators manage the price risk on behalf of growers, the FMC may have lost sight of many basics.

It is nobody’s case that farmers should not enjoy the price discovery and price risk management benefits that futures trading offers. It is simply that given the vulnerability of farmers — most of them small and marginal — to the machinations of savvy traders and speculators in the trading system, futures exchanges are not exactly the platform geared to delivering to them really significant benefits. If anything, farmers need information on and access to inputs, apart from agronomic advice, and would be grateful for a qualitatively better rural infrastructure — warehouses, access roads to marketing yards, cold-chains, and so on. Not even in developed countries do farmers attempt to trade on the futures exchange; they simply track the price trends and take a call on when and how much to sell. Without a strict regulatory regime in place, the proposal to encourage aggregators to trade on behalf of growers is fraught with danger as the latter could be short-changed, and the regulator may be blissfully unaware until damage is done. Importantly, it is quite unclear how the aggregator would trade on behalf of numerous growers, especially when their produce quality may not be uniform.

Obviously, there are several dimensions to the issue of involving farmers in futures trading. The regulator must keep off market development activities and concentrate on regulating the market. Market development activity is best left to the exchanges. A painful aspect of online futures trading is that many market players are beginning to abandon their traditional role as physical goods traders and are turning to derivatives or paper trading. Surely, no one would want farmers to abandon the real economy (their production of physical goods) and start chasing the ephemeral derivatives.

Related Stories:
‘Farmers should get benefits of futures trading’
FMC hints at tough measures against manipulators
Exit strategy must in volatile commodity market

More Stories on : Editorial | Regulatory Bodies & Rulings | Commodity Exchanges

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Crucial role of securities analysts

Sticking to the basics

Different voices

Legacy of Friedman versus Keynes

Micro enterprises in rural areas need credit oxygen

Case for more clarity to ‘third eye’

Financial markets prone to rumours

Invaluable iron ore reserves of India

Volatile market