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By Krishan Bir Chaudhary
It is generally understood that futures trading in agricultural trading will help in bringing price certainty. The Government of India in 2003-04 had initiated major steps towards introduction of futures trading in commodities, which included removal of prohibition on futures trading in all the commodities by issue of a notification and setting up of the National Level Commodity Exchanges. The momentum gathered in 2003-04 continued in 2004-05 and manifested itself in increases in volumes, participation, number of commodities traded and various new initiatives taken by the National Exchanges. The major agricultural commodities traded at these exchanges were soya oil, guar seed, guar gum, chana, jute, rubber, pepper, turmeric, wheat, kapas (cotton) etc. These exchanges have introduced various innovations which would increase efficiency of agricultural marketing in the country. However, on account of speculative trading and impact of prices of essential commodities, futures trading in wheat, rice and pulses like tur and urad has been suspended by the Forward Markets Commission as it caused market manipulation, leading to a rise in prices. But, still, a future trading is being carried out in a number of agricultural commodities.
The recent initiatives on part of Finance Minister P Chidambaram is testimony to the fact that futures trading in farm commodities could be the major cause for market manipulation. Presenting his Budget 2008-09, he slapped a commodities transaction tax (CTT) on options and futures on the lines of the existing securities transaction tax. “The commodity futures have come of age in the country and should be treated at par with the equity market,” he had said. Chidambaram also brought the commodity futures exchanges in the ambit of service tax. These measures were aimed at curbing manipulation.
It must be borne in mind that the government's move is only a piecemeal approach although it is increasingly realising the damage incurred by futures trading in agricultural commodities. As a corrective measure it should act fast to stump the problem in the bud by banning futures trading in all agricultural products. There is a wrong notion that the farmers are benefiting from the existing futures trading in the country. The farmers get the lowest price for their produce in the season at harvest and, thereafter, the produce passes into the hands of traders and corporate houses that manipulate high prices for commodities in the futures markets. Farmers have no opportunity to participate in this.
The Economic Survey 2007-08 clearly says: “Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margining and high membership fees – work as a deterrent to farmers' participation in these markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers.”
Farmers have no time to participate directly in the futures market. They have to prepare the field after harvest for the next crop. The concept that institutions or corporate houses should act as aggregators on behalf of farmers amounts to leaving the peasants at the mercy of these marketing giants.
The government has now gone into a panic mode as inflation, as measured by the point-to-point movement of the wholesale price index, reached a 40-month high at 7% for the week ended March 22, 2008. Yet, it is not totally critical about the neo-liberal architecture of the Economy that it has imposed upon the nation. It is taking a piecemeal approach like banning exports and liberalising imports of certain commodities. It is time the government rejected this neo-liberal and corporate-led agriculture model and replaced it by a farmer-centric one.
There is no shortage of food either at the global or at the domestic level. According to a recent report of the International Grain Council (IGC), the world wheat production would be at 646 million tonne (mt), an increase of 42 mt over the previous year, due to a 2.5% increase in the area under cultivation. The global prices of maize were around $240 a tonne by March 27. The IGC forecasts global maize output to decline by 20 mt to 748 mt. Barley output would increase 10% to 148 mt.
According to the official estimate, India has achieved record grain production of 219.32 mt in 2007-08, including 94.08 mt of rice, 74.81 mt of wheat, 36.09 mt of coarse cereals, and 14.34 mt of pulses. The cotton output is estimated at 23.38 million bales of 170 kg each, an all-time record. The oilseeds output is estimated at 27.16 mt.
Despite the good production, there is a deliberate manipulation of food prices both at the global and at the domestic levels. At the global level, there are a few corporate players in the food business that buy produce from farmers cheap, hoard the stock and manipulate the prices. The bio-fuel programme in Europe and the US is also a contributing factor to price rise.
In India, too, the corporate houses and retail chains have been allowed to buy produce from farmers, hoard and manipulate the market. The farmers do not gain in the process as they are paid relatively lower prices (see figure below) than what the corporate houses quote on the futures exchanges or in the spot market, or at what the retail chains sell to the consumers.
Source IMF Indices of World Commodity prices taken from http://www.businessline.in/cgi-bin/print.pl?file=2008040850360900.htm&date=2008/04/08/&prd=bl&
(The author is the president of Bharatiya Krishak Samaj, India's largest and oldest farmers' organisation. This article is reproduced extensively from the http://www.financialexpress.com/news/Futures-caused-the-market-manipulation/296336/0)
April 21, 2008
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