Futures Trade in Select Farm Items under Govt Lens Over 100% price rise in 3 months jolts commodity market regulator into action

SPECULATION, HOARDING DRIVING UP PRICES

Futures trading in seven food commodities, whose prices have more than doubled in the past three months, is under the government's scanner and action will be taken if there is evidence of speculation, said a top official of the commodity futures regulator, Forward Markets Commission (FMC). 

"The commission will closely monitor a few agri-commodities to check if there is any cartelisation or illegal trading by speculators, and will act upon it," said FMC Chairman Ramesh Abhishek. 

The FMC plans to monitor trading patterns, volatility and individual trader positions in black pepper, mustard oil, chana, potatoes, soyabean, cardamom and mentha oil, said another FMC official who did not wish to be named. 

Between January and March 2012, mustard seed prices have risen by 101%, chana 108%, potato 170%, mentha oil 172%, soyabean 118%, cardamom 185% and black pepper 122% on the exchanges. Mustard seed, chana, potato and soyabean are important contributors to the monthly food inflation index and impact consumer budgets. "Our effort is to nail people who are holding stocks and pushing prices unreasonably, thereby disturbing the trading pattern," said Abhishek. Ban on Mustard, Chana Trade 

FMC last week banned traders from taking fresh positions in the futures contracts of guar seed and guar gum on the NCDEX platform after speculative activities resulted in prices shooting up 500% and 1,000%, respectively, in the past year. Soon after the ban on futures trade in guar, the spot price at Jodhpur market in Rajasthan, one of the biggest producers, plunged . 1,500 to . 25,500 per quintal, traders said. 

News agency PTI reported the consumer affairs ministry has received proposals to ban futures trade in mustard seed and chana, and is examining them. But a decision on aban will be taken by the commodity futures regulator.

A futures contract is a promise between two investors to buy or sell a fixed amount of a commodity at a predetermined price and date. There is a direct link between futures and spot prices of agri-commodities on Indian exchanges because all contracts have compulsory delivery. Traders have to buy the commodity from the spot market and deliver it on the exchange at the end of each contract. This forces both prices to move in tandem. 

The Soyabean Oil Producers Association, or SOPA, on Thursday alleged soyabean prices are rising despite a bumper harvest due to malpractices in futures trading and demanded prompt action by Food & Consumer Affairs Minister KV Thomas. 

"Farmers have sold 80% of their produce. Most of the stock is with speculators who are driving prices. Nearly 2-3 lakh tonnes is net outstanding in futures, of which only 1-2% is changing positions. That clearly means circular positions are taking place," said Rajesh Agarwal, co-ordinator, SOPA. Spot prices of soyabean are currently at . 2,931 per quintal as compared to . 2,100 per quintal in the same period last year. 

However, market watchers say suspension of futures trading in any commodity is unnecessary since there are ample checks and balances in the existing system. 

"There is no need to suspend or restrict trading of commodities, but the FMC should lower individual client position limits and find out illegal activities through search and surveillance systems in various exchanges," said CARE Ratings Chief Economist Madan Sabnavis. Commodity exchanges, too, want futures trading to continue. "Where any contract is illiquid in the exchange, several surveillance measures are applied to ensure trading doesn't take place at artificial prices. Prices are determined by forces of demand and supply, including production, import/export, substitution effect and international prices," said National Commodity & Derivatives Exchange CEO R Ramaseshan. His exchange accounts for 80% of the total trading volume in farm commodity futures. 

Commodity futures trade, which started about nine years ago in India, has witnessed bans and re-listings of various farm products such as wheat, chana and sugar after excessive speculation, on the recommendation of the regulator. But the ban on tur, urad and rice has been in place for the past few years.