Markets thrive in a sustainable manner only under robust regulatory oversight. Though regulations can be seen as stumbling blocks in the path of innovation, regulators responsible for maintaining systemic stability have to proceed with caution. On and off suspension of futures trading in certain commodities by the government has to be seen in this context. In recent times, futures trading in urad and tur was banned in January 2007 (the ban still continues). Chana, refined soya oil, potato and rubber were banned for futures trading in May 2008 (subsequently the ban was lifted in December 2008). Wheat and rice were banned for trading in February 2007 (the ban on wheat was lifted in May 2009 while it remains on rice). Sugar was banned for trading in May 2009. While the suspension of sugar futures has been lifted, exchanges have not yet been permitted to allow trading in sugar futures.

In each instance, suspension of trading in commodity futures has been because of the perceived impact on price rise especially as some of the concerned commodities were a part of the basket on which wholesale prices were determined. This is not just typical to India. In the US, in the early days, futures trading struggled to gain legitimacy and the market had to put up with bans on futures trading in some commodities.

To be fair to Indian policymakers, there were not enough studies in the Indian context to debunk the notion that trading in commodity futures led to a rise in spot prices. So, they preferred to err on the side of caution. But on-off policies do effect market participation in commodity futures. Who would want to enter into a contract without knowing whether it would be honoured in the future or whether they would be able to roll it over should they so desire? More importantly, inconsistent policy prevents the development of commodity futures as a legitimate hedging tool. The various insurance schemes available for farmers are clearly not enough because most of them only cover crop failure and not price volatility. Commodity futures trading can fill in the gap here. This finds resonance in the report of the working group on risk management in agriculture for the Eleventh Five Year Plan, which has clearly mentioned the role of commodity futures in insulating farmers from income shocks arising out of price volatility.

Critics would say that farmers are not major participants in commodity futures but this need not be so in the future. Plus, with the expansion of the price-dissemination project (a collaborative effort of the Forward Markets Commission and the commodity exchanges to install price boards displaying spot and future prices of agri commodities at various mandis), awareness about commodity futures is definitely spreading. This is highlighted by a field study conducted by Harvard researchers over a two year period, which clearly showed that farmers who were exposed to price information boards showed greater understanding of the futures market and were also able to use futures market to form expectations of crop prices likely to prevail at the time of harvest. Let us not underestimate the power of information and knowledge penetration, and also the ability of farmers to use this knowledge.

The author is senior economist, NCDEX. Views are personal

Nilotpal Basu

Capital?s main function today is to act as investment for short-term speculative gains. The degree of such financialisation of the global economy can be gauged from the fact that in 2007 global FDI was estimated to be $50 trillion while that in global equity markets was $100 trillion and the global derivative markets was worth $516 trillion. This obviously had devastating ramifications, with the magnitude of transactions being unprecedented in conventional capitalism. The process then came full circle. The US financial system, which was spearheading the phenomenal mobility of finance while pulling down regulatory barriers across nations, became a victim of its own deregulatory offensive. A foretaste of the the financial crisis was explicit through the global oil futures market. A US Senate subcommittee report from June 2006 blamed the speculators squarely for the rise in oil prices. The report estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then price of $60 per barrel. It became abundantly clear that commodity futures constituted the heart of the financialisation of the global economy. Equally clear was that super profits in the futures market could not be sustainable.

But early signals were obviously ignored. The extreme upward curve of the oil futures soon impacted the food futures. Increasing evidence of a global food crisis became manifest on the streets of several nations across Asia, Africa and Latin America. The UN?s World Food Programme officials described this as a ?silent tsunami?, pushing an additional 100 million people into hunger. The crisis revealed that food had transformed from something that nourishes people and provides them with secure livelihoods into a commodity for speculation.

So much so that a contemporary study shows that 50-60% of the wheat traded in world?s biggest commodity markets came to be controlled by investment funds. Another estimate shows that speculative money in commodities future markets soared from $5 billion in 2000 to $ 75 billion in 2007. Now, the UN special rapporteur on the right to food has reported to the UN General Assembly that ?a significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble?. His report pointed out, ?If the buyer is willing to offer a higher price for a future than before, it means that she expects the eventual price of the commodity to increase further. As such, if the price of commodity futures goes up, it signals to sellers on stock markets to raise their prices. Indeed, the grain futures prices quoted by the Chicago Mercantile Exchange tend to be incorporated directly into grain trade contracts the world over.?

In India, on a year to year basis, the total value of trade in agri commodities in the commodity exchanges during the fortnight ending January 31 increased by a huge 64.14%. The cumulative value of trade in agricultural commodities from April 1, 2009 to January 31, 2010 grew by a whopping 102.59%?over Rs 10, 13,379.97 crore in absolute terms. In India, where as per latest FAO report the per capita foodgrain availability is even less than in some sub-Saharan countries, futures trading in food commodities has to be a strict no-no.

The author is a member of the central secretariat of the CPI(M)