Ban on futures trading of agricultural products should be removed

It is known in agriculture that Cobb-Webb syndrome exists. Farmers select the crop for sowing on the basis of the prices received in the previous season. So if soybean prices were higher in 2022, the trend would be to grow more of this crop. The result is more supply, which lowers prices. Ideally, farmers should focus on futures prices, and if possible sell the crop in advance when the price is favourable. Delivery is enabled if the parties so desire or the contract can be reversed before the due date. Either way, the price has been hedged. It is observed that farmers often rotate crops that require similar geographical and soil conditions.

It was with this objective that the Forward Markets Commission (now merged with the Securities and Exchange Board of India, or SEBI) regulated the contracts; And commodity exchanges facilitated them among traders. NCDEX became the preferred exchange for agricultural products, while MCX dominated the energy, metals and bullion markets. Initially, the progress was notable as NCDEX got value-chain participants to trade in products such as oilseeds complex, pulses, sugar, wheat, spices (cumin, chillies, turmeric and coriander) and guar. While the goal was to ultimately reach farmers, price signals were picked up through intensive price dissemination processes set up by the exchanges, in view of accessibility issues. Subsequently, when SEBI formally took over the oversight of these markets, the emphasis was on educating Farmer Producer Organizations (FPOs) and enabling them to play the role of aggregators to participate on these platforms.

However, there are too many vested interests due to which political decisions are being taken to ban futures trading. This has been a huge blow to the markets as useful price signals have been lost. What started as a ban on tur and moong has now widened to cover gram, soybean, soya oil, mustard seed and wheat. In all of these cases, robust price-discovery processes were in place. Frequent banning lowers the credibility of the market as players lose money when such decisions are taken.

In fact, delivery has been strong in India unlike other countries, even though delivery is generally an expensive proposition. But it has given credibility to the system as it brings value-chain members on board. It also confirms that it is not a speculative market, as is often made out by lobby groups. Ensuring delivery has led to the development of a transparent logistics ecosystem, which includes systems of grading and standards, weighing, storage, assaying etc. This has helped the government to develop the Electronic National Agriculture Market (eNAM), which is an electronic spot market.

The series of sanctions have resulted in a narrowing of the basket of goods now available. Trade volume in agri products was at peak for NCDEX 16.64 trillion in 2011-12. Thereafter, there was a sharp and sustained decline 8.70 trillion in 2014-15. After Reforms in 2015-16 5.96 trillion, after which the decline resumed 2.02 trillion in 2022-23. These restrictions need to be reconsidered.

One thing that has been established by SEBI and the exchanges is that regulatory processes are in place and are being followed to ensure that there is no room for manipulation of the markets. There are position limits to ensure the market is not overpowered and price limits control volatility. Curiously, every time a ban has been imposed that blames futures trading for the price rise, the exchanges have proved that the link does not exist, and also that after the ban, prices go up due to reduced supply. continues to increase.

Agriculture continues to be a sector that is vulnerable to aftershocks. A normal monsoon also does not prevent some areas and hence crops from receiving less rainfall, thus risking lower production. The futures market picks up on these signals. It is useful not only for farmers and value-chain participants but also for the government. A rise in futures prices ahead of harvest indicates an expected reduction in production and may trigger an appropriate response from the government in the area of ​​imports or exports.

Therefore, there is strong reason to revoke the ban on futures trading in all products, ranging from pulses to cereals and oil, to ensure that a market-oriented system works that provides correct signals. This will help farmers, hedgers (value-chain players) and the government. Price hedging by farmers would also be useful to banks, which run the risk of creating bad loans if crops fail. Vested interests should not be allowed to dominate and politics must be kept out of it. The agriculture sector needs booster reforms and lifting restrictions can be a good first step. Market players also need to be assured that depending on conditions (limits on prices and positions) the trading parameters may change, the building will remain intact. It’s too good a system to beat.

Updated: June 06, 2023, 11:23 PM IST