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Commodity hedging lower in India, more awareness needed

Re-introduction of futures trading in agri commodities in Nov 2002 saw the emergence of three national level derivatives exchanges including MCX, NCDEX and NMCE

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Even 10 years after trading was reintroduced in agri commodities, activities are yet to attract momentum.

After 40-odd years of suspension, the ministry of consumer affairs reintroduced futures trading in agri commodities in November 2002, which saw the emergence of three national level derivatives exchanges — Multi Exchange, National Commodity and Derivatives Exchange and National Multi Commodity Exchange. In addition to that, 21 regional commodity exchanges also offered futures trading in agri commodities, albeit meagrely.

But lack of efficiency among elite traders and deficiency of awareness, coupled with fear of frequent regulatory actions in essential commodities, kept a number of serious traders away from active participation. While individual farmers and traders stayed away from burning their fingers in futures trading, corporate participation also remained almost negligible.

Data compiled by US Department of Agriculture and Washington-based Futures Industry Association (FIA) showed the ratio of open interest to total crop size stands at a negligible 0.1 per cent in maize and wheat in against 21 per cent and 28 per cent in the world, respectively. The same ratio of soybean, sugar and barley recorded at 1.8 per cent, 0.4 per cent and 2.7 per cent in India against 41 per cent, 25 per cent and 0.20 per cent in the world, respectively.

Commodities like cotton and refined soy oil offer a huge hedging potential, which currently stands at 0.70 per cent and 14 per cent in India, compared with 20 per cent and 30 per cent, respectively, in the world.

The Forward Markets Commission (FMC), the commodity derivatives market regulator, attributes lower hedging in India to the lack of among individual traders.

While FMC has intensified organising awareness programmes in both rural and urban India to make all classes of people aware of the benefits of hedging, the sub-committee of the advisory panel, appointed by the regulator, feels these programmes are insufficient and hence, need to be organised more frequently.

“By far, hedging in Indian exchange remained lower, which needs to be intensified. We are moving on to work more closely with agencies like Central Warehousing Corp, Warehousing Development and Regulatory Authority and National Agricultural Cooperative Market Federation to organise more awareness programmes to improve participation in agri commodities,” said Ramesh Abhishek, chairman, FMC.

“A more pro-active role is required by all classes of people to expand hedging in India,” said a member of the committee.

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Commodity hedging lower in India, more awareness needed

Re-introduction of futures trading in agri commodities in Nov 2002 saw the emergence of three national level derivatives exchanges including MCX, NCDEX and NMCE

Despite over 10 years of re-introduction of futures trading in agri commodities, hedging activities are yet to attract momentum. Even 10 years after trading was reintroduced in agri commodities, activities are yet to attract momentum.

After 40-odd years of suspension, the ministry of consumer affairs reintroduced futures trading in agri commodities in November 2002, which saw the emergence of three national level derivatives exchanges — Multi Exchange, National Commodity and Derivatives Exchange and National Multi Commodity Exchange. In addition to that, 21 regional commodity exchanges also offered futures trading in agri commodities, albeit meagrely.

But lack of efficiency among elite traders and deficiency of awareness, coupled with fear of frequent regulatory actions in essential commodities, kept a number of serious traders away from active participation. While individual farmers and traders stayed away from burning their fingers in futures trading, corporate participation also remained almost negligible.

Data compiled by US Department of Agriculture and Washington-based Futures Industry Association (FIA) showed the ratio of open interest to total crop size stands at a negligible 0.1 per cent in maize and wheat in against 21 per cent and 28 per cent in the world, respectively. The same ratio of soybean, sugar and barley recorded at 1.8 per cent, 0.4 per cent and 2.7 per cent in India against 41 per cent, 25 per cent and 0.20 per cent in the world, respectively.

Commodities like cotton and refined soy oil offer a huge hedging potential, which currently stands at 0.70 per cent and 14 per cent in India, compared with 20 per cent and 30 per cent, respectively, in the world.

The Forward Markets Commission (FMC), the commodity derivatives market regulator, attributes lower hedging in India to the lack of among individual traders.

While FMC has intensified organising awareness programmes in both rural and urban India to make all classes of people aware of the benefits of hedging, the sub-committee of the advisory panel, appointed by the regulator, feels these programmes are insufficient and hence, need to be organised more frequently.

“By far, hedging in Indian exchange remained lower, which needs to be intensified. We are moving on to work more closely with agencies like Central Warehousing Corp, Warehousing Development and Regulatory Authority and National Agricultural Cooperative Market Federation to organise more awareness programmes to improve participation in agri commodities,” said Ramesh Abhishek, chairman, FMC.

“A more pro-active role is required by all classes of people to expand hedging in India,” said a member of the committee.
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