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Hedging ban a slow political process to kill futures market

The futures markets were restarted in India less than five years ago with much fanfare and as a much-needed price discovery mechanism, especially for agricultural commodities. It was also envisaged to be a platform for hedging, i.e. price risk management for producers (read farmers), consumers, processors and traders. In many ways, it was a godsend for farmers in particular because agri-commodities see wide price fluctuations exposing the farmer to unnecessary price risks.

The logical response of any government would be to ensure that farmers have a fair and transparent pricing mechanism available for their products. Even the Abhijeet Sen committee report, in its second point of reference, was clearly asked to find ways to increase the participation of farmer in futures trading.

Instead, the government has gone ahead and banned futures trading in eight of the most economically important agricommodities and even as it is itself hedging wheat on the Chicago Board of Trade. At the very least, the dichotomy between banning wheat futures here and then going and hedging in the US market it intriguing. What’s sauce for the goose must be sauce for the gander.

If the government feels that hedging is economically sensible, why not other consumers and producers? When our government hedges abroad, it means admission that it is using the foreign markets for price discovery and risk management. But why not in India? Why hedge abroad when there are excellent commodity exchanges available right here in India. In fact, we have the most modern exchanges in the world in terms of infrastructure.

To see the effects of banning agricultural commodities from the exchanges, let us take the example of wheat. Today, the farmer has no way to know what the price is, the MSP is not adequately disseminated and most of it is given to the local aggregator under compulsion, there is no risk management mechanism available to him, he is currently being paid lesser than global prices because the information has deliberately kept away from him and the authorities seem to be proud of this.

Of course, if the intention is to make the farmer subsidise the rich then it is a different matter. For example, look at the recent statement from the authorities. It has been stated that domestic prices of wheat are lower in Indian markets compared to international markets. The argument is that if wheat gets relisted , the prices of wheat will go up in line with international trends.

In other words, in a world of liberalisation and globalisation, the farmer is deliberately being blindfolded to world prices and is being made to subsidise the rest of the country. Depending on how you look at it, it is tax on agricultural income in a different avatar. Uncertainties surrounding the economic slowdown and inflation should not lead to victimising the farmer, on whom substantial economic growth and 65% of employment depends.

Price discovery to farmers is essential given the opacity of our spot markets. Hedging risk is a facility which must be made available as a useful tool to the farmer. Impending and forthcoming price patterns and indications are available from futures markets so suitable steps can be taken.

For example, before banning, wheat futures prices showed a sharply upward trend on the exchanges and the government, instead of reading the signals and taking corrective action, chose to ban the futures trading in wheat.
So what is the solution and how will it help? In a well-thought-out strategy, multiple strata of initiatives are required to improve the commodity business in the country but foremost among them is governmental encouragement, regulatory, business and infrastructural support.

The government should become a buyer on domestic commodity futures exchanges like NCDEX, MCX and NMCE. Thus, the procurement process can be done via Nafed, FCI, etc. Governmental participation will take commodity business and its logic of pricediscovery and risk management to the next level and improve participation at the higher end of the system and will be in congruence with stated aims of globalisation and liberalisation.

The task becomes that much easier because at least two much-awaited electronic spot markets will be operationalised this year. It’s time to grasp the opportunities which are staring us in the face. In fact, access must be enhanced to all segments and the over-riding idea should be inclusion rather than exclusion of this facility.

It is an accepted logic worldwide and is the basis of the large volumes which take place in commodities trading worldwide. This is an upcoming field and government participation will help build a suitable environment for knowledge entrepreneurs (who in any case cater to the West through KPOs today) with abundant access to capital.

We already have one of the most modern trading platforms in the world in addition to a regulator who clearly knows his job but is handicapped due to governmental interference. A steady growth curve for this exciting industry will be a given and this will help increase the procurement and storage efficiency of the system with benefits to all strata, after all, some 30% of foodgrain is wasted every year due to storage shortages.

The warehousing network will improve dramatically in a short time with benefits flowing directly to the farmers. It will work as a vector for the industry to provide more solutions for commodity business which will clearly see much volatility in prices worldwide in the years ahead. It is a bulwark against many global threats which India cannot escape by having a pigeon-like approach. Like someone famously said: ‘The government should lead, follow or get out of the way!’

Though its too early to predict the impact and fallout of the recent steps, the governmental attitude towards commodity markets is no mixed bag, it is decidedly stepmotherly and can easily be looked upon as a slow political process to kill the futures industry (witness banning of certain key agri-commodities, CTT, no autonomy for FMC etc).

Engagement with the government has, so far, not yielded suitable results. But there is hope yet because the benefits are numerous. India is among the largest producer or the largest consumer of a host of commodities, agricultural and otherwise.

It is logical that we should be the price-setters in this market on a global basis. If we don’t, then we will continue to be at the mercy of international mercenaries who will raise prices as soon as our requirement is made public. And in more ways than one, the price will be paid for by Indian farmers.

 
(By Jayant Manglik)

Source: Economic Times


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