Why agri futures are losing their fizz

Trading volumes on the agri commodity exchanges have been thinning.

In the first eight months of 2017, total turnover at NCDEX, the country’s largest agri futures exchange, was ₹3.43 lakh crore, down from ₹5 lakh crore for the same period last year.

In fact, turnovers at the agri exchanges have been shrinking since 2012. Volumes today are just about a third of what they were five years ago. Turnover at NCDEX and MCX agri basket together was ₹21.2 lakh crore in 2012. In 2016, this was just ₹7.8 lakh crore.

There are many reasons why agri futures have lost their sheen.

One, regulatory uncertainty, with the government suspending agri contracts every now and then, has turned away traders. Trading in tur, urad, rice and wheat was suspended in 2007, and has not been allowed since then. Chana contract was suspended in May 2008 and re-launched in November 2008.

In June 2016, the contract was again suspended, and re-launched in July this year.

The same is the case with soya oil, sugar, guargum, rubber and pepper, where there have been repeated interventions by the government, said Vinod TP, Research Analyst, Geofin Comtrade.

Second, the introduction of the Commodities Transaction Tax (CTT) in 2013 proved a dampener. Not just the non-agri commodities, but processed agri-commodities such as refined soy oil and crude palm oil too came under the new transaction tax. Consequently, the jobbers’ margins fizzled out.

The NSEL scandal unfolded the same year, wherein many thousands of investors lost their money.

In 2015, SEBI took over the reins of the then commodities market regulator, FMC, which restored confidence in the system.

However, by 2016, measures including a hike in initial margins and a reduction in the maximum position limit allowed for clients/members, disincentivised trading in agri commodities.

The last straw was the Centre’s demonetisation move in November 2016, which led to a fund crunch among traders, affecting volumes.

However, hedging activity is increasing in agri futures. Given that the main objective of this platform is to help commodity users/manufacturers manage price risk, this is seen as a positive effect.

Hedging interest There is a growing awareness of and an interest for hedging on agri commodity platforms of the three national commodity exchanges, NCDEX, MCX and NMCE.

MCX claims it is seeing good hedging participation in commodities, including mentha oil, crude palm oil and cotton.

“The increased price volatility in cotton in the recent past is the reason why participants are turning to the MCX platform to manage price risk and protect margins,” said an MCX spokesperson. “Besides, corporates like Mafatlal are also trying to comply with SEBI’s LODR (Listing Obligations and Disclosure Requirements) rules, which need risks to be disclosed to shareholders, by taking adequate hedges.”

The prominent hedgers on the exchange’s platform are Glencore India, Cargill, Olam, Arvind, Sportsking, Manjeet Cotton, Emami Biotech, Noble Natural Resources, Gokul Agro Resources, Bunge India, Adani Wilmar, Sharp Menthol India, Allus Cardamom and Century. NCDEX toohas seen increased participation from FPOs (farmer producer organisations). There are about 84 FPOs registered with the exchange now, up from just one in April 2016.

So far, 51 FPOs representing 46,803 farmers have used the NCDEX platform to hedge or deliver their produce.

The commodities traded include maize, soyabean, R.M. Cake, castor seed, wheat, barley, guar seed, turmeric and jeera. But FPO volumes account for a small portion of the turnover.

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