The Hindu Business Line : Market signals

POLICY-MAKERS NEED to pay a lot more attention to commodity market dynamics if their intention of protecting growers and consumers interests is genuine. This is especially necessary in the case of items in which the government plays an interventionist role. The prices of two essential commodities — wheat and sugar — are threatening to cut loose. It is indeed a matter of concern for all, because both commodities have large weights in the consumer price index. The upward movement in the price of wheat, which not unexpectedly crossed the psychological Rs 1,000 a quintal recently, has happened despite repeated government assertion of adequate stocks to see the nation through till the next harvest due by April. Although the prospects of the next crop appear satisfactory (to be sure, not exceptionally bright) on current reckoning, the harvest is still over eight weeks away and the weather over that period will be critical.

High open market prices — considerably above the declared procurement price — usually result in lower procurement. So, uncertainty over public stocks rebuilding adequately during marketing year 2005-06, beginning June, cannot be ruled out. Likewise, price prospects for sugar too do not look consumer-friendly. Currently, the market is somewhat reined-in. But the signals point to prices galloping northward, given the uncertainty over the production for the whole season. As sugar is a controlled item, there is a good deal of responsibility on policymakers to ensure that consumer interest is not hurt. Based on the inputs it has, the Government believes it can tide over the situation; but brave words without tangible supporting evidence seldom impact the market.

Markets, like time and tide, wait for no one. The commodity market, by its very nature, is volatile. Its movement is based not only on current demand and supply fundamentals, but also on anticipated changes; and the widely anticipated changes over the coming months point to tightening of supplies of wheat and sugar, and too much speculative money chasing these commodities. The government reaction to rising prices is usually knee-jerk and results from inadequate research and commercial intelligence. Will it be different this time? Will the early signals be taken note of and responded to appropriately?

Ironically, while wheat and sugar prices show a strong upside thrust, the oilseeds and vegetable oil market is in the dumps. Higher domestic production notwithstanding, imports are continuing. Oilseed prices are depressed (despite a general commodity boom) and farmers' interests jeopardised. The situation is worsened by large-scale import of vanaspati from Sri Lanka at zero rate of duty, and from Malaysia at a low rate. The inverted duty structure is to blame. Vanaspati (a finished product) attracts lower (30 per cent) duty while its raw material, crude palm oil, attracts 80 per cent. These anomalies distort the market and force players to resort to undesirable practices. There are specific Government departments to monitor and guide commodity markets such as those for wheat, sugar and edible oils. They need to get active and provide such direction to the market that the interests of domestic producers and consumers are protected.