On September 28, 2007, MCX Academia of Economic Research organized a seminar on Agri-Commodity Futures in India: Impact on Production and Prices. The discussions throughout the seminar focused on two key issues—whether futures prices influence spot prices; and how farmers can benefit from futures trade.

During the keynote address, Mr B C Khatua, chairperson of the Forward Markets Commission, said that the recent ban on the future trade of four key agri-commodities was not affecting the market on a large scale. According to him, the need of the day is a stable market, which is based on perfect (or near-perfect) contract designs. Mr Khatua also highlighted the fact that futures prices are not distorting spot prices. He mentioned an IIM study that shows that there is no direct correlation between the rise and fall of futures and spot prices. Prices of commodities being traded at present have fallen, whereas cost of commodities whose futures trade has been put on suspension is on the rise. This situation notwithstanding, the FMC chairperson sounded warning bells regarding complacency in the surveillance system of futures trade. “Though futures market can influence spot prices, but it should not do so beyond the demand-supply forces. Another key constraint is the absence of free flowing market information,” Mr Khatua said. He concluded by stating that spot market prices are not homogenous, and in fact future market helps physical market to become homogenized (hence leading to better price discovery). But there is always a danger for the market becoming distorted in the absence of adequate regulations.

During the first session, whose theme was Futures Trading in Agricultural Commodities – An Economic Overview; nine papers were presented. Throughout the session, most participants agreed on the fact that the need of the day is reforms that will ensure that farmers also participate in futures trading. At present there are no statistics to show that how far farmers are involved in futures market. The discussion focused on the fact that education of farmers regarding commodity trade is very important, and exchanges should go to the rural areas. It was also revealed that though, government lifted the ban on futures trading in 2003, no communication strategy was devised to ensure that the benefits trickled down to the farmers. At present farmers are nowhere in the future markets, and only middlepersons are benefiting. Even in influential states like Punjab, farmers are not aware about commodity exchanges.

Education of farmers should include six vital terms—stock, futures, commodity, hedging, speculator, and arbitrator. The participants concluded the session by stating that  it is the duty and responsibility of the government departments to ensure that farmers are trained in commodity trading, especially as these instates can bear the heavy cost involved in such a training.

The second session, whose theme was Ranking of APMCs as Potential Futures Market,saw another seven papers being presented.  In this session, the participants debated on how futures trade is helping markets to converge across the country. Discussions also centered on how to develop new exchanges to help the rural poor. One participant suggested that the Agriculture Produce Marketing Committees (APMC) can be used for developing new exchanges. But this suggestion evoked a strong response from many. They highlighted the fact that APMCs were not functioning properly in many states. “The trading community may be waiting with bated breath for the impending report of the Abhijit Sen panel on the commodity forward markets and the impact of banning futures trading in dal and wheat on domestic prices, but the regulatory framework on even spot trading exchanges is not in place yet,” said one of the participants. State APMC Acts had to be amended for this, but till June 2007 only 12 states and one UT have completed the process of amending the Act.

During the last session, whose theme was ‘Strategies for Developing Research Commodity Futures, the role of research on commodity market was discussed thoroughly. Some participants raised doubts about how different papers using the same data produced different results. Such occurrences were attributed to crop-to-crop variations and to differences in market intelligence reports used by researchers. Another part of the discussion during the session concentrated on the role of price discovery, and the reasons for future market not developing at a fast pace in India. It was stated that the futures market is being stifled right now as many politicians do not believe in it, especially the Left parties. It was said that industry organizations like FICCI should lobby with the government to ensure that futures markets develop. “We need to educate the members of parliament even before we train the farmers,” said one of the participants.

In the concluding remarks for this session, it was said that econometric tests are not sufficient to test short-term changes in commodity markets. In fact, econometrics models are not intended to help decision-makers. “They are more of a directional thing, subject to various caveats.” They facilitate in finding a degree of association between market changes and magnitude of perfections as well as imperfections. For analysing intra-day changes, separate techniques of analysis exist. The need of the day is to understand the functioning of a commodity exchange to evolve effective policies.

In his concluding remarks, Dr Madhoo Pavaskar, Director of MCX Academia of Economic Research, said that it is crucial for demand-supply forces to decide the viability of futures markets. “Why should a trader come under any regulation? Our frame of mind is that everything should be regulated, but this is wrong. The need of the day is to deregulate the future markets,” he concluded.

» Back to Seminar Page