Futures trading ban fails to cool retail prices in India, say reports

'Sans futures contracts, FPOs were unable to hedge against price fluctuations'

Before December, when suspension expires in futures trading in seven major agricultural commodities, studies by academics are unanimous that the retail prices of none of these fell after suspension.

 

The academics are from institutes such as the Birla Institute of Management Technology (BIMTECH), Vinod Gupta School of Management, Indian Institute of Technology (IIT) Kharagpur, and Shailesh J Mehta School of Management in IIT Bombay

In contrast, volatility in many of them rose many notches after futures trading was suspended. This once again emphasises domestic and international demand and supply, not futures trading, were influencing the retail prices of the commodities.

 

The studies also found that without futures contracts, farmer-producer organisations (FPOs) were not able to hedge against price fluctuations, making them vulnerable to market volatility. The findings were based on a survey of some FPOs. 

 

“Commodity exchanges play a crucial role in addressing these issues by providing training, warehousing facilities, price anchors, quality checks, and better bargaining power,” the BIMTECH study said. 

The BIMTECH and IIT-Kharagpur study was based on an analysis of soybean, soya oil, mustard seed, and mustard oil while the one done by IIT Bombay examined the effects of suspension of exchange-traded commodity derivatives contracts on the agri-ecosystem of five commodities — mustard, refined soy oil, soybean, chana, and wheat. 

In December 2021, the Securities and Exchange Board of India (Sebi) suspended derivatives trading in five commodities/commodity groups (wheat, soybean, crude palm oil, paddy, and moong) for one year with immediate effect.

In addition to these five, the regulator suspended futures contracts in chana and mustard seed/mustard oil on August 17, 2021, and October 8, 2021, respectively. Sebi extended the ban for one year until December 20 this year.

Though Sebi’s press release did not mention the reasons for the suspension, it is widely believed this was done to tame rising prices. 

The BIMTECH study, meanwhile, found the retail-to-wholesale price difference in the post-suspension period was also much higher than in the pre-suspension period. 

In the case of mustard oil, the post-suspension difference is Rs 11.97 as compared to Rs 9.22 during the pre-suspension period. The lack of domestic hedging options would force domestic hedgers to access international futures markets, exposing them to basis risk. 

Basis risk is the residual risk faced by hedgers, which is the difference between spot and futures prices for a commodity. It arises from factors influencing futures prices and spot prices varying from time to time, the paper showed. 

The study found suspension led to increased volatility in mandi prices for mustard seeds and soybean seeds, with daily volatility increasing in April 2021 onwards.

 

The study by academics from IIT Bombay, based on the trends in retail prices of suspended commodities as well as their peers, suggests that suspension was based on the presumption of a positive relationship between commodity futures trading and food inflation. The analysis finds no evidence of that.