::IMC::

Commodity Futures Suspension Can’t Peg Food Price Rise, Says NCDEX Economist
Date: 15-Feb-2010

Mr Madan Sabnavis, Chief Economist of NCDEX, says that imposition of a ban on commodity futures for checking the current spiralling prices of agricultural and other commodities won’t achieve the objective. Instead, such a step will inflict a serious collateral damage on a wide front. It will be an attempt at barking a wrong tree, he says.

The current price spiral is not due to commodity futures but mainly due to a sharp fall in agricultural production -- by 15 per cent -- causing a wide gap between demand and supply, lack of transport and storage infrastructure in rural areas, and a disjointed and ineffective distribution system. Even after imposition of ban on futures trading in some commodities, their prices have continued to spiral, according to Mr Sabnavis.

He was addressing a seminar on "The role of commodity exchanges in India", organized by IMC’s Economic Research & Training Foundation (ERTF) jointly with the Forum Of Free Enterprise (FOFE) and The Economics Club at IMC’s Walchand Hirachand Hall on February 11. Among other speakers were: Mr D R Pendse, former Chief Economic Advisor to the Tata Group, Mr M R Shroff, FOFE’s President, and Mr G S Panikar, the Economics Club’s President.

Welcoming the distinguished speakers, Mr Suresh Kotak, an expert on commodity market and Trustee of IMC-ERTF, said that India was a major consumer of bullion, energy and agri products. It was also a major producer of agri products, and was now fast integrating with the global economies.
He said, "The Indian Markets have recently opened new avenues to retail investors and traders to participate in commodity futures. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best options. Till some months ago, retail investors had no scope to invest in the gold, silver oilseeds futures market. But, with the setting up of multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks."
In recent years, commodities emerged as a new asset class for market-savvy investors, arbitrageurs and speculators. Investors increasingly opted for commodities like gold as part of their asset diversification strategy. Also, the price performance of commodities in recent times was better than that of several other asset classes.

Investors were now flocking the commodities market to benefit from price volatility.

On the other hand, the producers and consumers of commodities continued to face risks of price volatility, in the face of uncertainties about global growth prospects, fluctuating supplies and changing demands of commodities, and lack of integration of markets.

Mr Kotak said that the uncertainty necessitated increased levels of hedging in the futures market. Risk management through commodity derivatives assumed a great importance for India. Future course of the Indian commodity market -- with all its forward and backward linkages -- had a great impact on health of the national economy and would directly reflect in the growth of GDP and exports.

Mr Sabnavis said that the commodities market had a complex regulatory structure by multiple authorities in India. The Union Ministries of Finance, Consumer Affairs, and of Company Affairs, as well as the State Ministries of Cooperatives and Agriculture administered the commodity markets directly and through regulatory authorities such as the Forward Markets Commission (FMC), RBI, SEBI, etc.

Quite often, their policies did not coincide, as they did not see eye to eye, resulting in a turf war by different regulatory authorities. For instance, the recommendation made by the RBI five years ago that banks be permitted to deal in the commodity markets was still in limbo. "The bank finance needed for warehousing agriculture products has not been forthcoming yet," he said.
Mr Sabnavis said that farmers needed warehouses for storing his produces both in the village and at the market place, so that he could wait for an opportune time to sell his produces. "As at present, the farmers have no warehousing facility near the market place, he is compelled to sell the produces like tomatoes, potatoes and onions at throwaway prices to traders’ cartels," he said.

He referred to an ongoing turf war between FMC and SEBI. While FMC favoured participation of brokers, retailers, corporates, FIIs, banks, mutual funds and NRIs in the commodity derivatives market, the SEBI was against permitting participation of the banks, FIIs and mutual funds.

Commodity markets had a low correlation with both the stocks and Government Securities market. In view of this, commodity markets could be a good avenue for portfolio diversification. But, brokerage firms were not allowed to deal in commodity futures, Mr Sabnavis said.

Mr. M. R. Shroff said that there was a lot of disinformation, by both the political leaders and media, that the futures trading by speculators was responsible for the current inflationary trend in commodities, such as sugar, food grains and oilseeds.

Arvind Pradhan
Director General