THE commodity market regulator has allowed the ban on sugar futures to lapse, paving the way for trading, an important step towards lifting all government controls over the industry.
"We have allowed to lapse the ban on sugar futures trading today," BC Khatua, chairman of Forward Markets Commission (FMC), said on Thursday.
A decision on launching new contracts will be taken in 2-3 days in consultation with the sugar industry and commodity exchanges, he said. Shares of sugar companies rallied after the decision.
The launch of new contracts, when it happens, will be a resounding validation of the growing belief that futures trading is not the prime mover of sugar prices. Retail sugar prices had shot up to a record 50/kg in January this year due to very tight production (14.5mt) in 2009-10 when the futures trading ban was in place. Currently, the prices are around 30-32/ kg, close to 40% drop. India is the largest consumer of sugar. Trading in sugar futures was banned for six months in May 2009 to rein in soaring prices. Later, the ban was extended till September-end.
"Futures trading in a commodity is a mechanism for price discovery and price risk management and not a mechanism to control the prices nor is it responsible for price rise in any commodity," the government had admitted in Parliament in reply to a question on sugar futures. However, lack of clarity on sugar production caused the delay in lifting the ban.
Leading commodity exchanges such as Multi Commodity Exchange and National Commodity Derivatives Exchange, where sugar futures are largely traded, said they were ready with new contracts and are awaiting FMC approval. "Against the backdrop of projections of bumper sugar production this year, there would be no other option than to allow hedging," Indian Sugar Mills Association (ISMA) director general Avinash Verma.
The mood among the players is far from one of joy. "This is step towards decontrol of the sector. But the full potential of futures trading in sugar can only be achieved once sugar price is market determined and all government controls are removed," said Ajit Shriram, director, sugar at DSCL.
The government is yet to dismantle two key speedbreakers to optimum price discovery on futures trading platform. The monthly sugar release system, which continues to remain, is the most powerful weapon for intervention in the market in the event of unusually high sugar prices and relaxation of stock holding strictures on traders.
The Centre can even increase sugar releases mid-month with a view to checking perceived a price rise, curtailing the efficient functioning of the futures market. The FMC decision comes amid forecast of record sugar production in 2010-11 (24mt-25mt) by both the industry and the government. In addition to a carryover of around 5mt of sugar, the availability would be 30mt compared to a home consumption of only 23mt. This has resulted in apprehensions that unless hedging is allowed, the bottomline of sugar mills will plummet in tandem with plunging sugar prices.
"We have allowed to lapse the ban on sugar futures trading today," BC Khatua, chairman of Forward Markets Commission (FMC), said on Thursday.
A decision on launching new contracts will be taken in 2-3 days in consultation with the sugar industry and commodity exchanges, he said. Shares of sugar companies rallied after the decision.
The launch of new contracts, when it happens, will be a resounding validation of the growing belief that futures trading is not the prime mover of sugar prices. Retail sugar prices had shot up to a record 50/kg in January this year due to very tight production (14.5mt) in 2009-10 when the futures trading ban was in place. Currently, the prices are around 30-32/ kg, close to 40% drop. India is the largest consumer of sugar. Trading in sugar futures was banned for six months in May 2009 to rein in soaring prices. Later, the ban was extended till September-end.
"Futures trading in a commodity is a mechanism for price discovery and price risk management and not a mechanism to control the prices nor is it responsible for price rise in any commodity," the government had admitted in Parliament in reply to a question on sugar futures. However, lack of clarity on sugar production caused the delay in lifting the ban.
Leading commodity exchanges such as Multi Commodity Exchange and National Commodity Derivatives Exchange, where sugar futures are largely traded, said they were ready with new contracts and are awaiting FMC approval. "Against the backdrop of projections of bumper sugar production this year, there would be no other option than to allow hedging," Indian Sugar Mills Association (ISMA) director general Avinash Verma.
The mood among the players is far from one of joy. "This is step towards decontrol of the sector. But the full potential of futures trading in sugar can only be achieved once sugar price is market determined and all government controls are removed," said Ajit Shriram, director, sugar at DSCL.
The government is yet to dismantle two key speedbreakers to optimum price discovery on futures trading platform. The monthly sugar release system, which continues to remain, is the most powerful weapon for intervention in the market in the event of unusually high sugar prices and relaxation of stock holding strictures on traders.
The Centre can even increase sugar releases mid-month with a view to checking perceived a price rise, curtailing the efficient functioning of the futures market. The FMC decision comes amid forecast of record sugar production in 2010-11 (24mt-25mt) by both the industry and the government. In addition to a carryover of around 5mt of sugar, the availability would be 30mt compared to a home consumption of only 23mt. This has resulted in apprehensions that unless hedging is allowed, the bottomline of sugar mills will plummet in tandem with plunging sugar prices.
