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Wednesday, April 16, 2008

Commexes don’t invent the price, they just help people discover it

15.04.2008 from Indian Current Affairs by ramkyc@gmail.com (Ramakrishna) Derivatives trading on commodity exchanges Time and again we are faced with this debate. Today’s debate in ET is a very good read. Recommend it strongly, in spite of our having covered the subject earlier in our blogs. Do so here. Some excerpts worth our noting:

It is incorrect to say that derivatives trading are fuelling price inflation. Futures trading provides vital clues to the state of demand-supply mismatches which was evident in case of wheat in 2006, tur in 2007 and even in this year in case of mustard, where lower output has been forecast by the government. Hence, futures trading mirrors economic fundamentals and if they are weak, the same will be reflected and one needs to address the fundamentals rather than the image.
A ban on futures trading cannot hence change the fundamentals. We banned futures trading in wheat, urad, tur and rice last year. Prices of tur went up during the entire year due to a shortfall in production. Wheat prices reacted to global influences and continued to rise, and last week’s inflation data shows that rice prices have also gone up sharply. Hence, banning futures will simply remove a powerful signalling tool which can otherwise be used by the government to plan the supplies.
Prices of fruits, vegetables, milk, coarse cereals, pulses like urad, tur and masoor, which are not traded on the exchanges have registered very high increases.
Another example is edible oils. The hardening of edible oil prices is basically due to the rising crude price as well as due to the obsession of various countries with the production of biofuels. With crude holding above $110 more and more countries are willing to use their mustard, soya, maize, and palm oil for producing biofuels. This has led to extra demand for the food grains and edible oils, something that was not there before the advent commexes in India.
So the government, instead of making a scapegoat of the commexes, should take concrete steps to help farmers grow more food. It should help them by developing infrastructure like irrigation canals and warehouses. India’s current warehousing capacity for farm produce stands at around one million tonnes — too little for accommodating the demands of farmers. Enhanced warehousing capacity will empower farmers and save them from distress sale, thus providing them with better incomes, which will only spur them to grow more food. We are currently witnessing the scenario in West Bengal where a bumper crop of potatoes has not resulted in bumper profits for the farmers, since the warehouses are already full and the farmers are forced to sell their produce at a ridiculously low price(Rs 150/quintal.) To sum up, the commexes don’t invent the price, they just help people discover it.

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