Millions of potato growers in Punjab, Uttar Pradesh and West Bengal are reeling under the impact of a sudden and sharp fall in retail prices of the commodity, which in many cases have even gone below its cost of production. It turns out that there was warning all along of the impending price crash only if someone would have paid a little more attention to the much-maligned futures market.
A study of potato futures on the country?s largest commodity futures exchange MCX, shows that all through January and February, the March futures was showing a price of around Rs 5-6 per kg, while in physical markets, the same commodity was selling at an average retail price of around Rs 10 to Rs 15-per kg. That the spot price did fall to Rs 5-6 in early March, close to the March futures prices quoted two months ago, may reinforce the argument that futures market is an indicator of coming market conditions in many agri-commodities.
The analysis is based on MCX?s Agra potato contract. MCX data show that around first week of January, the March potato futures was quoted at Rs 6.1 per kg to Rs 6.6 per kg, which subsequently dropped to almost Rs 5.5 per kg by the end of February. The contract closed at around Rs 6.3 per kg on March 15, near the spot market rates.
Says Jayant Manglik, president, Religare Commodities: ?This is not the first time it has happened; in fact, months ahead of the ban on futures in some commodities, the same thing had happened. The information or price signals shown by the futures markets should be used constructively, like for determining cropping pattern or even the country?s food security.?
Though there is broad consensus that futures markets do predict spot prices fairly accurately, some political parties and analysts believe that in a country like India ?? with an underdeveloped commodity futures market and trade distortions aplenty ?? the price discovery mechanism remains highly vulnerable to manipulators.
Supporters of the futures market say such close spot-future price linkages should be used for other essential commodities as well to help formulate policy responses. Says Vibhu Ratandhara, assistant vice-president, Bonanza Portfolio, one of the country?s biggest commodity brokerage house; ?Price indicators from futures markets might not be 100% correct, but it does give a fair indication of how the prices would move in future.?