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LATEST NEWS UPDATES | Bullion dominates futures market, agriculture at 10% by Sidhartha

Bullion dominates futures market, agriculture at 10% by Sidhartha

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published Published on Dec 11, 2011   modified Modified on Dec 11, 2011

Policymakers have repeatedly said that commodity futures help farmers hedge their risks. But data from Forward Markets Commission (FMC), the regulator for the business worth Rs 106 lakh crore during April-October, paints a different picture.

The share of agricultural trade is just a tad over 10% and within this, food products such as soya oil and chana accounted for less than 7% of the total value. Of course, the government itself is to blame for this partly as it has banned futures trading in several commodities such as pulses, say market players.

Last week, CPM leader Sitaram Yechury and BJP's M Venkaiah Naidu raised the issue again during a Parliamentary debate on price rise. Naidu pointed to a report by a committee headed by Gujarat chief minister Narendra Modi, which suggested that all essential commodities be kept out of the futures trading arena. Yechury had said futures trading was contributing to surge in prices. Officials, however, contest the claim. Market players too said that the fear of bans and restrictions was also keeping traders away from the food counters.

Futures are a risk hedging tool, which helps farmers and producers cover their risk using contracts that mature after a stipulated period. So, what's driving up volumes? More than half is bullion, with silver generating the maximum volumes, followed by gold. In fact, for the futures market as a whole, silver accounted for almost 36% of the volumes, while the yellow metal made up for a quarter of the market.

After bullion, metals and energy are the most popular bets at commodity exchanges. But both put together do not add up to what silver alone can do (see table).

In fact, officials in the government and regulatory bodies acknowledge that there is a problem with some of the contracts and non-delivery is an issue that has cropped up in various forums over the last few weeks. A senior official pointed to trading in Western Texas Intermediary, which is a crude oil contract. Although you can trade in the commodity, there is no possibility of delivery of the product, raising fears that there may be speculation going on in some of the items that are traded.

Former FMC chairman B C Khatua, however, said delivery was not a must as market participants were able to hedge their risk. Say, you enter the market when the price of wheat is Rs 1,100 but by the time wheat reaches the mandi, the price reaches Rs 1,150. If you had hedged, the Rs 50 increase would be covered. "The basic risk is zero or close to zero," he said.

The former regulator also said that volumes were low in farm products due to low awareness levels. "Farmers should ideally be getting into options contracts since it does nor require them to monitor prices on a daily basis. But the law does not allow that," Khatua said. Besides, he said that given the volatility in bullion prices, there was more hedging in these products. Sources said delivery was something that was being discussed with market participants too to address concerns over speculative trade.


The Times of India, 12 December, 2011, http://timesofindia.indiatimes.com/business/india-business/Bullion-dominates-futures-market-agriculture-at-10/articleshow/11075517.cms


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