Recently the government had liberalised edible oils imports and even permitted soyabean imports in split form. Oilmeals are freely exportable now and in this openness, arbitrage on the domestic futures market would only serve the needs of smaller operators who are unable to trade on foreign markets.

The trade liberalisation can result in a different type of price formation in India.

1) Seconality in international oil prices is much stronger than in India, and 2) Now there are greater chances of it being imported. For the above two reasons, contracts which face competition from abroad, are not likely to be successful.

Amongst various oilseeds and oils, the most likely contracts to be successful are groundnut and rapeseed - mustard. Soyabean contracts are likely to have difficulttimes, with trade liberalisation as it is may become a subsidiary to Chicago futures.

I am of strong opinion that the edible oilseeds contract should complement edible oils contracts. Edible oilseeds contract alone, could have a difficult life because it is likely that they will not attract much interest from the oilseeds processing industry.

The demand by the oilseeds processors for the combination of both an oilseeds and oils futures contracts is likely to be large since it will give them the ability to estimate and secure their future processing margins. An effort will have to be made to generate participation from the trading and indirectly from the farming community - through commission agents, oilseeds growers' associations and co-operatives - inorder to generate market liquidity.

The pattern or price co-realisations suggest that edible oils and non-edible oils should be seen as two distinct groups. Provided government interference in price formation are reduced significantly, a futures contractin one type of oil is likely to provide for the risk management needs of other oils from that group.

Traders in mustard oild could then use a groundnut oil contract with only small basis risks; users of linseed oil could use a castor oilcontract. The fact that one could not make to take is only a minor incovenience. This brings out an inference that there could be cross-hedging of oils and oilseeds contracts - which automatically improves the liquidity of the commodity exchanges.

In the short run, few regional contracts are likely to perform better than national contracts. The absence of a common integrated domestic market for the oilseeds strongly suggest that there may well be space for more than one exchange trading oilseeds products' contract.

Starting from an imperfect physical market situations where regional markets appear to be better integrated than the national market, basis risks across exchanges are likely to be large and deter active participation on a single, national exchange.

Withgradual lifting of government restrictions on the domestic oilseeds markets, the performance of these markets are expected to improve and regional physical markets will become better integrated.

As the domestic physical market becomes better integrated, the competition from among commodity exchanges will intensify. The most active and better performing ones will be automatically favoured by market forces.Public policy, including exchange regulations, should focus on optimizing the contribution that futures markets can make to the national economy. This would require them to realize their potential, while at the same time controlling abuses, both in the functioning of futures trade and in the use that unscruplous brokers may make of exchanges.

Commodity exchanges should avoid their members abusing it and to make as wide a group as possible to benefit from the functions that they perform for risk management, and in the collection and dissemination of price information.

(The author is the CEO ofProphecy Investments - a commodity risk management and trading consultants)