India will soon complete 150 years since organised futures trading in agricultural commodities was started with the establishment of the Bombay Cotton Trade Association in 1875 to trade cotton derivatives contracts. In the following years, institutions for futures trade in oilseeds and food grains were set up. While the futures trade in a number of farm commodities such as cotton, groundnut, jute, castor seed, wheat, rice, sugar, gold and silver flourished between the first and second world wars, allegedly rampant manipulations led to a ban on most farm futures trade in the mid-1960s. Since then, futures or forward trading in agricultural commodities has remained controversial, and subject to frequent curbs or government interventions.
Towards the end of the last century, as India liberalised and became globally integrated, the need was felt to restart the commodity derivatives market. India launched a completely electronic online commodity derivatives market for the first time in the world. The total electronic marketplace evoked a massive response, urging developed countries to phase out the open outcry systems and adopt the Indian model. However, after posting a huge three-digit annual compounded growth, Indian farm futures received a major jolt when the government banned pulses, wheat and rice futures, blaming them for food inflation, though it was proven false in the Parliamentary panel’s report a few years after the ban.
Inconsistent approach
Since then, futures trading in pulses, oilseeds, edible oils, and food grains were suspended on 6-7 occasions after food prices rose sharply, even though the rise was caused mainly by supply shocks rather than futures trade. The latest ban came in 2021 when the Centre suspended nine farm futures initially for a year and then extended by another year until December 2023.
The futures market is extremely useful in efficient price discovery and price risk management, which helps producers to pre-fix the sale price of their produce, and processors, domestic traders and exporters to secure their raw material supply smoothly and at the right price. It also allows all of them to put capital to its optimum use, thereby reducing costs. More importantly, a developed commodity futures market also helps countries to become price-setter of commodities in which they are either prime producers or consumers or importers and exporters.
Indonesia, the world’s largest producer with around 50 million tonnes of crude palm oil (CPO) output, is planning to become the lead price-setter by launching futures trading in palm oil. Currently, Malaysia, which is the second largest producer, with just 18 million tonnes of output, has the world’s benchmark CPO futures contract traded on the Bursa Malaysia Derivatives exchange. Indonesia is not able to digest this fact anymore and hence is launching its own CPO futures trade.
Taking charge
Last year, when the world was fighting hyperinflation in edible oils, Indonesia banned exports of palm oil in an effort to increase domestic availability and control prices. However, the decision set prices of the tropical oil on fire and at a premium over rival healthier soft oils like soyabean oil and sunflower oil. The decision boomeranged due to incomplete research on production, logistical and storage capacities, internal and external trade and prices among others. But the country has learnt a lesson and realised that accurate data and information, necessary to make key policy decisions, can be obtained promptly only when there is a vibrant futures market like the one offered by the CME Group in the US.
China, which had started farm futures trade with two agri-commodities exchanges around the same time as India, has become one of the leading players globally influencing even the US and European farm prices.
Now consider India. The country is the world’s largest producer and consumer of chana (chickpea) and many pulses, among the top three in wheat and rice production, the largest importer of edible oils, and almost a monopoly producer of turmeric, mentha oil, castor seed, guar seed, isabgol and many other farm commodities. Yet, the castor oil price is discovered at Rotterdam or influenced by China and guar gum prices are often dictated by importers in the West.
At times, prices of pulses in the Indian market are influenced by Canada or Australia, which export yellow peas, chickpeas and lentils to India. Despite being the largest buyer of edible oils, palm oil prices are driven by Malaysia and Indonesia and by Brazil and Argentina for soya oil. In the case of gold too, despite being the second largest importer at over 1,000 tonnes, prices of gold are dictated at London or the US.
Bans Hurt Farmers
At the producer level, Indian farmers are known to be marginal and uncompetitive and economically weaker. Distress sale at the time of harvesting has been routine for nearly seven decades now. The agri-derivatives market offered them the opportunity to fix their selling price at the time of sowing when prices are high. Farmers have been learning price risk management and are eager to onboard derivatives platforms to hedge their price risks at sowing.
However, sudden suspensions of nine farm futures have stripped them of their right to remunerative prices. For example, mustard prices which were at Rs 6,500 per quintal at the time of sowing have slid to Rs 5,100 when the crop is ready for harvest. Soyabean prices, which were quoted at Rs 6,800 at sowing, crashed below Rs 5,000 in early October last year. In both cases, the absence of futures hurt farmers. And, the government continues to be a major player in the commodity market as it procures almost a third of India’s 300 million tonne-plus foodgrain production.
Parallel to it, one of the most modern and robust agricultural market infrastructure built over 20 years in form of electronic auction platforms, futures market, e-negotiable warehouse receipt system and scientific warehouses, which has the potential to offer better prices to farmers, reduce wastage in handling and transportation of farm produce and formalise of farm trade lie underutilised or even unutilised.
Indonesia has correctly identified the future of the agriculture market and taken appropriate measures. India is among the leading producers of a large number of commodities and the strongest and most resilient market for food with its 1.38 billion population. The country is also being looked upon as a sustainable source of farm goods by the world. The infrastructure and a pool of talent to accommodate a robust agri-derivatives market are already in place. Whether to leverage it or leave it is for our policymakers to decide.
Shrikant Kuwalekar is an Agri Journalist, Price Risk Management & Agri Value-Chain strategist. Views are personal, and do not represent the stand of this publication.
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