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Indian Vegetable Oil Producers’ Association (IVPA) has urged the government to resume futures trading in suspended agri commodities. The Securities and Exchange Board of India (SEBI) suspended trading in certain agri commodities in December 2021. The suspension was extended for one more year till December 20, 2023.
In a letter to Ashwini Kumar Choubey, Union Minister of State for Consumer Affairs, Food and Public Distribution, Sudhakar Desai, President of IVPA, said the suspension was imposed with a hypothesis that the derivatives market is fuelling the volatility in the prices. He said the movement in prices of commodities since the beginning of 2020 was due to global fundamental reasons and derivatives markets have no role in the same.
Strains in global supply chains due to logistical bottlenecks and various types of sanctions have further accentuated the problem. Derivatives market has no role whatsoever in the overall price volatility, he said.
Risk management
Stating that derivatives markets are majorly for price risk management in the volatile market, he said derivatives market increases the awareness on quality standards, helps in the development of ancillary infrastructures like quality testing, logistics, warehousing and price dissemination, and thereby improves returns and reduces wastage.
Stating that farmers are deprived of an efficient price discovery mechanism in the absence of a futures market, he said it provides real-time prices without any geographical boundaries barrier and no entry barriers. Added to this, processors take additional support of futures platforms for efficient inventory management.
He said the physical arrivals in agri commodities have a pattern that 60 per cent produce arrives in market during the first four months and remaining 40 per cent produce in the remaining months. Prices get disturbed in physical markets during peak arrival period, he said, adding, futures markets act to stabilise these prices.
Support for FPOs
Referring to the government’s thrust on farmer producer organisations (FPOs), Desai said these FPOs through collective power are in a better negotiating position and futures markets have supported them for managing price risk. This suspension in agri futures contract is weakening bargaining power of FPOs in marketing of their produce/products, he said.
Apart from this, the futures market provides a cushion to importers to plan out imports in a better manner and channelise the domestic supply chain. In the absence of a futures market, there is disturbance in efficient supply of edible oils in the domestic market, thus affecting the interest of end consumers, he said.
Mustard below MSP
The arrival of mustard has peaked now, and currently getting sold for around ₹4,800-4,900 a quintal in various mandis, while the cost of cultivation for mustard seed is around ₹4,300 a quintal.
Although MSP (minimum support price) of mustard seed is ₹5,450 a quintal, farmers are not able to realise this price as procurement of the seed at MSP has not started in most of States. If farmers do not get remunerative prices for their oil seeds production, they will shy away from its sowing in the coming season, he said.
Apart from this, the soyabean sowing period will begin in the next two months. In the absence of remunerative prices, farmers would be demotivated to grow oilseeds, which will have a negative impact on the Prime Minister’s mission of atmanirbharta (self-sufficiency) in edible oils and oilseeds, he said.
In the absence of locally available mechanisms to hedge the price risk, value chain participants have to hedge their price risk on international exchanges. This leads to further dollar outflow in terms of margins and other expenses. Sometimes price on international exchanges are not perfectly correlated. This creates extra risk on commodity as well as on currency. Small players don’t have access to hedge on international exchanges.
In such a situation, the edible oil value chain remains at the mercy of the physical market, left with no tool to hedge the price risk, he said.
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