Don’t blame futures trade. It Doesn’t Cause Inflation

The Economic Times Editorial Thursday, 03 August, 2006

WHEN Sonia Gandhi speaks, the Congress Parliamentary Party is duty-bound to agree. Naturally, the CPP said “amen” when she said that forward trading in wheat had caused inflation and required better regulation. This follows earlier accusations of hoarding. But what exactly is the complaint? All wheat is bought at harvest time and stored, and this cannot be called hoarding. Traders sell some wheat every week in the following 12 months, and the rate of sales determines the price. When they scent scarcity, they may delay sales, yet research shows that traders sell all stocks before the next harvest. Prices are high today because wheat production has stagnated for six years, and fell sharply last year. The impact on prices cannot be reversed through imports. The landed price at southern ports is Rs 1080/quintal, against the market price of Rs 1000/quintal. So, little has been imported by private trade, though the government is importing wheat for its buffer stock.

The global economic boom has pushed up the demand for and prices of all commodities, from oil to iron ore, and wheat is no exception. Unless our scientists evolve new varieties with higher yields, prices will not come down. As for futures trading causing inflation, consider the history of the futures contract for July delivery that has just expired. This contract was quoted in March at Rs 829/quintal, rose to Rs 993 in May, but then fell steadily to Rs 825 on expiry in July. So, the speculative buyers accused of pushing up the price in April-May would have lost fortunes on taking delivery in July. Where are the supposed speculative profits?

Thin markets can be rigged, but there is no evidence of that in wheat. Congressmen seem less interested in understanding markets than in returning to the anti-market populism of Indira Gandhi. Futures give early warning of shortages. They improve price transparency and thus prevent middlemen from creaming off the lion’s share. Globally, the era of futures has coincided with the steady fall of world prices of all grains in real terms in the last century, notwithstanding the recent rise. Marxists will not understand this. But Congressmen should.