Futures and Commodity Market News

Sat May 17, 2008

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New Delhi, May 09, 2008 (Asia Pulse Data Source via COMTEX) -- There is no relationship between price rise and futures trading, said a note prepared by the Consumer Affairs Ministry barely a month before it ordered ban on forward trading in four commodities to check prices.

Giving examples on price movement of several commodities before and after the ban on futures trade, the note said, "there does not, a-priori, appear to be any correlation between price rise and the fact that a particular commodity is traded or not in the futures market." However, within a month after clarifying its position in a note, which was circulated to different ministries for comments, the Consumer Affairs Ministry banned futures trading in rubber, gram (channa), potato and soya oil.

The government last year had banned futures trade in wheat, rice, tur and urad.

The note, however, said ban had not led to decrease in prices of these commodities.

The price of rice, which was delisted one year back, the note said, increased by about 26 per cent. Similarly, in case of tur, the price of tur continued to rise despite ban. In case of urad, the declining trend continued even after the ban, which was also indicated by the futures.

It cited the examples of potato and onion to butress the point that price movement at the retail level has no relation to futures trading.

Though potato was traded on the exchange platform, onion was not. Still, both the commodities showed large volatility in prices.

"The fundamental reason for upward or downward movement of prices was not the absence or presence of the derivatives market, but factors like seasonal variations and transport bottlenecks," the Consumer Affairs Ministry said.

Pointing out that inflation in China driven by essential commodities, the note said, the the Chinese government has not discontinued the futures trading. There has been brisk trading in essential agricultural commodities like soyabean, maize, palm oil, soya oil, mustard oil, sugar and wheat in Chinese futures market, it added.

The Chinese government has allocated different commodities to the country's three main exchanges -- Dalian, Shanghai and Zhengzhou.

In India, however, several political parties including the CPI(M) as well as the BJP have been demanding a ban on futures trading of all essential commodities to contain the price rise of food articles.

The note also said while the spot prices are often manipulated by a few traders over which the government has no control.

The prices in the spot market are determined by the interplay of forces of demand and supply (arrivals) on that particular day, including monopoly power of a few traders, it said, adding the producer armed with the knowledge of the futures, can avoid resorting to distress sale.

The government also highlighted that companies like ITC, Unilever and Britannia were hedging on the exchange platform as they require a huge volume of agricultural commodities for manufacturing their products.

Futures trading performs the role of risk management where the processor can be assured of supply at a pre-determined price, the ministry said.

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