The Hindu Business Line : Has wheat futures ban helped insulate India from global price shock?

Since the de-listing of fresh futures contracts in the commodity in the 2007-08 Union Budget, wheat prices have ruled remarkably stable in the domestic market, even while being on the boil globally.

On February 28, 2007 (Budget day), wheat was quoting at around Rs 1,035 a quintal in the Delhi wholesale market. With the new crop’s arrival, prices fell below Rs 1,000 in the early part of April, touching a low of Rs 910 a quintal towards end-May.

By early-July, they had crossed the Rs 1,000 mark again, but traded within a narrow range to close the year at about Rs 1,060 a quintal.

Current year trend

In the current calendar year, too, domestic prices have been generally range-bound — crossing Rs 1,100 a quintal on January 10 and peaking at Rs 1,160 on January 18 and then declining with the seasonal trend to sub-1,100 levels from mid-April, and remaining there till the first week of this month. On Saturday, wheat was selling at Rs 1,100 a quintal.

All this is also reflected in the average wholesale price index (WPI) of wheat, which has increased marginally from 232.1 to 233.1 between February 2007 and April 2008, subject to the normal seasonal variations.

Disconnected prices

During the same period, world wheat prices (of the benchmark US No. 1 Hard Red Winter variety) have spiralled from $200 to over $362 a tonne (free on board, Gulf of Mexico), having averaged $439.72 a tonne in March!

The above disconnect between domestic and global price movements was not so pronounced in the pre-futures ban period.

Between March 2005 and March 2006, the WPI of wheat went up by 11.9 per cent, in tandem with the 15.5 per cent rise in world prices.

Subsequently, between April 2006 and February 2007, the WPI climbed by 16.7 per cent, even as global wheat prices strengthened by 10.9 per cent.

The period since then has witnessed a total de-linking — while wheat prices have triggered unrest spilling over into food riots elsewhere, the Indian market has exhibited relative tranquility. And coincidentally, this has happened after the ban imposed on wheat futures.

“Although no clear causality can be established, it seems that the transmission of international price pressures on domestic wheat prices has been much lower following the ban.

“This was not so earlier, when the screen-based trading in commodity exchanges could capture international price movements more quickly and these got reflected in domestic prices through the ‘reference price’ role played by futures prices,” said Prof Abhijit Sen, Chairman of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices.

He, nevertheless, clarified to Business Line that “what I am saying is only a conjecture that requires more rigorous testing”.

Also, it did not represent the Committee’s view, which had held that there was “(no) clear evidence of either reduced or increased volatility of spot prices due to futures trading”.

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