NCDEX debunks futures ban logic

The average 35.58 per cent increase in the minimum support price (MSP) of the four commodities that were banned from the futures platform indicates that the government is convinced that the demand-supply fundamentals are responsible for the price behaviour of essential commodities, said the latest report by the NCDEX Institute of Commodity Research (NICR).

The four agricultural commodities — tur (pigeon-peas), urad (black gram), wheat and rice — were banned from trading on the futures platform as the government believed it to be responsible for the price rise. The government also suspended futures trading in four more commodities — chana (chick peas), potato, soyoil and rubber — for the same reason.

Over the years, the MSP of tur saw moderate increase, but 2007-08 onwards, it was raised significantly in alignment with the spot market price. In fact, for the 2008-09 kharif season, the MSP was raised 29 per cent to Rs 2,000 per quintal.

Surprisingly, even after the ban, the average monthly spot price of tur rose 53 per cent between January 2007 and August 2008 due to lower availability.

This clearly indicates that the rise in prices of the commodity was not related to its trading in the futures market but was guided more by the forces of demand and supply. Last year, however, the MSP was increased by 10 per cent to Rs 1,550 a quintal with an additional bonus provision of Rs 40 a quintal.

The MSP of urad for 2008-09 season was raised by 48 per cent to Rs 2,520 a quintal for the benefit of farmers. The research finds that urad was the worst hit in terms of acreage for the current kharif season. The crop did not get adequate rain in May (the sowing period). This is expected to ensure availability of pulses in the domestic market and also check farmers’ diversion to other crops.

However, in the spot pulses market, prices slumped below their MSP. The average monthly price in July and August this year remained around Rs 3,000 a quintal.

Prior to the ban, the prices in the month of January were in the range of Rs 3,227- Rs 3,550 a quintal.