Futures trading in agricultural commodities does not lead to price changes: study
The suspension of futures trading of several agricultural commodities on commodity exchanges last year had no impact on retail price volatility, according to a study by three researchers, including one from the Indian Institute of management (IIM) of Udaipur.
Stating that futures market suspension is often justified because of speculative activity emanating from trading in the futures market, the study titled “Assessing the Impact of Commodity Derivatives Suspension” stated that it found no role of the futures market on price changes. Nor does it find any empirical evidence of the impact of the trade suspension on price behavior.
On the retail prices of mustard oil before and after the imposition of the futures trading ban in October 2021, the study found that retail prices for the product showed an increase in volatility following the imposition of the futures trading ban. ban while the prices of all other edible oils, regardless of their commercial status in the derivatives market, declined.
“This indicates no impact of the suspension of derivatives contracts on mustard oil prices,” noted the study which focused on two commodities – mustard and chana. “The analysis shows that mustard oil prices would have had a similar trend even without the suspension,” the study said.
In the case of chana, whose futures trading was banned in August last year, price volatility was minimal after and before the imposition of the suspension.
Detailed price movements and other information on mustard and chana have been analyzed as their demand is largely met by domestic production.
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Since 2005, the government has so far suspended 17 futures contracts to curb the inflationary trend.
To curb inflation, on December 20, 2021, the commodity exchange regulator Securities and Exchange Board of India banned futures trading in wheat, paddy (non-basmati), chana, mustard seed, soybeans, crude palm oil and moong for one year. Previously, futures trading in mustard seeds and chana (gram) was suspended on October 8, 2021 and August 16, 2021
Stating that the suspension of futures trading such as mustard seed and other commodities discourages the growth of domestic agricultural derivatives markets, the study noted that the move prevents India from setting global benchmark prices. , although it is the main producer and consumer of several agricultural products. .
Calling for the lifting of the ban on futures trading for the development of the agricultural derivatives market, the study suggested that there should be strict market surveillance and effective enforcement, transparency and timely availability. information on production and inventory trends, which took the fear out of the market. volatility.
The suspension of futures trading is hampering growth in the development of quality networks under the Warehousing Development and Regulation Authority, which provides transparency and traceability of agricultural commodity stocks through a Electronic Negotiable Warehouse Receipt (e-NWR) issued to farmers.
According to Vijaya Lakshmi Nandendla, Joint Secretary of the Ministry of Agriculture, there is a need to raise awareness and understanding of the derivatives market where price risk can be hedged among key stakeholders including farmers in the chain. of agricultural value.
The study was carried out on behalf of the NCDEX Investor Protection Trust Fund. The objective of the study was to assess the impact of various policy decisions on the development of the cash market and derivatives.
The study was carried out by Nidhi Aggarwarl, IIM, Udaipur, Tirtha Chatterjee, Jindal School of Government and Public Policy and Karan Sehgal of Carlos III University of Madrid.