The year 2008 would be remembered in world history for its upswings and downturns in the various exchanges around the world. It was an extraordinary year that everyone would wish to forget but nonetheless, we have to live with the reality. This period witnessed the world’s lone superpower, the US, come down on its knees, as the financial system cracked due to the subprime crisis and thereon the heat was felt in other economies, including developed and the developing. Commodity prices on the major global exchanges also moved in tandem with the extreme bullish sentiments during the first half of 2008 and a complete reversal in fortunes in the second half wherein, all logic and value-based prices went for a toss. Fear took over the basic demand and supply fundamentals, leading to extreme gyrations in the prices of major commodities.
Despite this global turbulence, the volumes of agricultural commodities at the global exchanges during the period January 2008 to December 2008 have increased by almost 38% (Y-o-Y), according to the “Futures Industry Association” (FIA) report. However, in our domestic markets, trading volumes in agricultural commodities have declined by 17%-18% during 2008, as the suspension of the four commodities (refined soy oil, chana, potato and rubber) led to a decline in investor’s confidence.
On comparing the commodity trading volumes of the global markets with the Indian exchanges, the share of agro commodities in the global commodity derivatives is almost 49%, whereas in the case of our Indian markets, agri trading volumes contribute a share of around 10%-15%. This article tries to highlight the potential of Indian Agri trading markets, a comparison of Indian versus international agri markets, barriers to growth along with steps needed to further develop and provide impetus for future growth.
Indian agricultural markets are unorganised in the sense that the stocks of various commodities are held by a group of people. Physical markets are therefore fragmented and are dominated by a chain of intermediaries. This causes the actual participants (farmers) to loose confidence in the trade conducted on the spot markets. In this scenario, commodities derivatives play a pivotal role in the price risk management, especially in an economy with a huge agricultural surplus. Futures trade provides farmers with better price discovery of their produce and to safeguard themselves against any unpredictable price developments. Taking appropriate positions at the futures market help them to face the imbalances in supply of the commodity, thereby mitigating the risks.
In the global markets, commodity derivatives such as forwards, futures, swaps, options and other derivative products are extensively used for hedging purposes. However, in the Indian markets, we today have only one trading instrument, that is “futures contracts”.
Also, as the Indian commodities exchanges are still in the developing stage, only the near-month contracts have sufficient volumes. This acts as a roadblock for corporate and hedgers who are interested in taking a long-term view and forcing participants to necessarily rollover their contracts frequently.
In the developed commodity exchanges, volumes are primarily driven by 10 to 12 major commodities, which include soybean, sugar, corn, cotton, wheat and other. Whereas, at our Indian Exchanges we have almost 45-50 commodities listed for trading activities. In spite of so many agri commodities listed, the major volume drivers are only a handful.
The price movement of these commodities, to a very large extent, depends on the fundamental aspects of demand and supply in the developed markets. However, due to various domestic constraints’ like non-availability of reliable data, fragmentation of spot markets, etc, leads to certain inefficiencies.
Developed markets in futures trading have undergone vast growth and changed with technology, making it possible for market participants to trade globally 24 hours a day on a multitude of newly designed platforms. With the advent of online National Commodities Exchanges like NCDEX and MCX, the participation of intermediaries involved in agri markets has grown multifold. This has lead to better price discovery and also evinced interest amongst the corporate world to hedge their price risks on the exchanges. But, at the grass root level for enhancing farmer’s participation, a lot needs to be done to educate and create awareness of the opportunities available at the futures trading platform. For delivery-based transactions, entire supply chain and logistics issues need to be resolved, which is very essential for the growth of the physical markets. The development of these physical markets will ultimately lead India towards becoming a major player and price setter of important agri commodities globally. Lastly, agri commodities trading, which launched in India in the year 2003, also has often been subjected to government interventions and regulations as agri commodities are price sensitive in nature. Suspension or banning of certain commodities creates uncertainty in the minds of the market participants. To reach the next stage of development for agri markets, certain immediate steps are required. These steps are needed to propel further growth of agri commodities business in India.
1.Industry bodies should make representations to the FMC and ministry of consumer affairs to permit other market participants into the market such as mutual funds/banks/financial institutions/NRIs etc.
2.Conduct investor workshops and seminars across India to create awareness about commodities exchanges, their functions and their usefulness in the minds of corporate / exporters / importers / agri traders. This activity is currently being undertaken at various levels by FMC/exchanges/members, but there is a need for a coordinated and concerted effort from all stakeholders. We strongly believe that this activity is of prime importance for the sustained growth of business over the long-term.
3.FMC should be made an autonomous body, on the lines of Sebi to provide it with the necessary powers to take decisions for the betterment and growth of the Indian commodities markets.
4.An amendment in the FCRA (Forward Contracts & Regulation Act,) which is long overdue, is the need of the hour. These amendments as proposed would allow other derivative instruments such as options trading in commodities exchanges.
5.As India is an agri-based economy, there is tremendous potential for agri-commodities business on the exchanges. Farmers/co-operative societies/agri-industries should be closely involved in developing the supply chain across regions. Educating farmers as to the benefits of the commodities exchanges would also go a long way in ensuring the growth of the agri commodities business.
6.Presently, the hedged positions on the exchanges are very miniscule, which has potential to be increased greatly. Internationally, it has been found that commercials or hedgers hold close to 40% – 50% of total Open Interest.
We are of the view that the steps mentioned above, if taken, would go a long way in the development of agri commodities markets in India and ensure visibility of Indian agri commodities markets across the world.
The author is head, commodities, Angel Commodities