Kicking Off Cotton Futures Trading A Tough Task

The Union government has at last realised the importance of `futures trading' and permitted the same in certain commodities like ginned and baled cotton, baled raw jute and jute goods and castor oil for which an International Futures Exchange would be set up. This will be the second commodity going global when futures trading commences in it.

The move to widen the range of commodities permitted for futures trading in India is indeed timely. As per the report of the UNCTAD secretariat, most of the existing internationally-traded futures contracts have been set up to serve western traders and consumers. The government's move to open International Futures Exchange in India provides an excellent opportunity to look at such issues as the basic risks, delivery specification and trading hours from the domestic and regional context.

 

Though the government has permitted the futures trading in certain commodities and finished its duties, the implementation or the commencement of it is not so easy particularly in commodities like cotton which has a wide range of varieties.

The need of the hour is to expediate procedures like infrastructure set up, legal aspects and to commence the futures trading in the permitted commodities as soon as possible in a more practical way.

Traditionally, commodity exchanges functioned as a forum for price discovery and hedging.

Even when they have not been permitted to trade futures contract, commodity exchanges have played a significant role in bringing buyers and sellers together in a common meeting place to resolving quality problems and to reinforce confidence in the performance of contractual obligations and in undertaking counter-party risks.

According to India Pepper and Spice Trade Association, commodities exchanges are poised to play an active role in the context of agricultural commodities including pepper.

It moves through a chain of value adding activities beginning with the farmers and ending with consumers. It is learnt from experience that many operators who successfully create value within a chain have suffered serious losses from adverse price movements when they have been denied access to trade related risk management instruments such as futures and options.

The assurance of remunerative prices for farm produce can only sustain the desired level of private investments in the agricultural sector. In the past, the government sought to prevent fall in farm produce prices through such measures as monopoly procurement, production control and cut-backs, export retention scheme and government funding to provide credit to help growers to avoid distress selling.

Under the circumstances of the resource crunch and the compulsions of the liberlisation, the government may no longer be able to provide budgetary grants for price support programmes. Consequently, market participants would find it necessary to make use of trade related risk management instruments such as commodity futures and options.

Meanwhile, the exports of black pepper has continued to maintain an upward trend which is quite visible from the following table.

From the above table, it can be seen that the volume of shipments during the last five months from October'96 to February'97 has touched 21,555 tonnes as against of the volume of shipments of 9,170 and 14,174 tonnes during the corresponding period of 1995-96 and 1994-95 respectively.

The export trend in exports has been well maintained in February 1997.