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G. Chandrashekhar

Mumbai, Dec 1

There is heightened expectation in the commodity trading circles about the revival of futures trading in at least four commodities – potato, soya oil, chana and rubber. Suspension of trading lapsed on November 30, and no fresh notification of extension had been announced until early afternoon on Monday.

Other commodities whose derivatives trading stands prohibited include rice, wheat, urad and tur. The commodity futures market regulator – Forward Markets Commission (FMC) – is in no position to take an independent decision on restarting derivatives trading in the aforesaid commodities.

There is a reason to believe, the FMC has been waiting for official communication from New Delhi before making any official announcement. FMC is under the administrative control of the Union Ministry of Consumer Affairs.

Terror-linked developments of last week in Mumbai and response thereto may have ensured that every other issue receded into the background in New Delhi.

The expectation of market participants, who are keen that trading revives without delay, has been strengthened by inflation data coming out in recent weeks.

So, the big question is, it is time to revive futures trading in suspended/banned commodities? A reality check shows that the recent decline in the rate of inflation is driven principally by a significant downward correction in prices of energy (mainly crude) and metals such as steel, copper and aluminium.

Food prices have not collapsed the way energy and metals have. Food prices are still high and food inflation is not exactly under control. Within the food basket, vegetable oil is perhaps one commodity whose prices have declined markedly at the wholesale level; but not so much at the retail level.

On the other hand, prices of essentials such as wheat, rice and sugar are still high enough to continue to cause discomfort to consumers. Cotton prices too are high. A sharp increase in minimum support price for various crops has arrested the downside.

Seasonal factors too have played a part in the current price scenario. The country is currently going through the peak marketing season for major kharif season crops. The situation is not without concerns though. The estimate of various kharif season crops clearly points to a decline in output as compared with last year. Whether pulses, oilseeds, coarse grains or sugarcane, there is decline in crop size which in course of time would lead to tightening supplies.

In case of both pulses and cooking oils, the country is facing chronic shortage and is dependent on imports to a considerable extent. A weaker rupee has made imported food expensive.

Importantly, there still are restrictions on the physical market which have not been removed. Export restrictions and administrative controls such as storage limits continue to stymie the physical trade. For instance, export of pulses is banned. Export of edible oil also remained banned until a few days ago when, under pressure from the industry, the Government allowed export with quantitative and other restrictions.

It would be incredibly naïve to lift the restrictions on futures trading when restrictions on the physical trade continue. After all, the futures market is intended to help physical market participants - whether as producer, consumer or trader - to hedge the price risks.

It would be like putting the cart before the horse if futures trading were permitted without freeing the physical market.

New Delhi may be well advised to consider the negative implications of allowing too much money to once again start chasing commodities in short supply.

More Stories on : Commodity Markets | Commodity Commentary | Commodities

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