Agricultural commodity futures are market based instruments for managing risks and orderly establishment of efficient
agricultural markets. These are used to hedge commodity price risks. The hedging and price discovery function of the future markets promote more efficient production, storage, marketing and agro-processing operations and help in improving overall agricultural marketing performance. Commodity trading is just one step in solving the complex Indian agriculture problems. Although formalized future trading in agricultural commodities has been in place since 1918-19, the future trading in commodity through commodity exchanges came to its own very recently. But the trade was mostly in the form of forward contracts. Although India has a long history of trade in commodity derivatives, this sector remained underdeveloped due to government intervention in many commodity markets to control prices. Free trade in many agricultural commodities is restricted under the
Essential Commodities Act (ECA)-1955 and
Agriculture Produce Marketing Committees Act (APMC) of various states. The forward and futures Contracts till April 2003, was limited to only a few commodities items under the
Forward Contracts Regulation Act (FCRA)-1952. However, in 2003 Government of India removed all restrictions on commodities which could be traded on commodity exchanges. At present 25 commodity exchanges are in operation in India carrying out futures trading in as many as 81 commodity items. Most of these exchanges are regional and commodity specific. National Multi Commodity Exchange (NMCE) status has been accorded to four commodity exchanges, namely,
National Mutli Commodity Exchange (NMCE) Ahmedabad,
National Board of Trade (NBOT), Indore,
National Commodity Derivative Exchange (NCDEX) Mumbai and
Multi Commodity Exchange (MCX) Mumbai during 2003. These exchanges have excellent financial backing, demutualised ownership structure and more transparent electronic trading system. The
Forward Markets Commission (FMC) established under
FCRA-1952 is the agency which regulates commodity derivatives trading in India in the same way as SEBI does for securities markets.
In some areas farmers are gradually getting aware of futures prices which are disseminated through exchanges. In the capital market, spot market developed before the derivatives market which made the things easier. In the commodity space, the derivatives have come before the so called integrated spot market. Future market is a boon to the farmers. Under the prevailing scenario, Commission for Agricultural Costs and Prices (CACP) recommends Minimum Support Prices (MSP) with no guarantee that farmers will get that price. Generally, MSP acts as the maximum price that is paid to farmers. Open-ended purchase could continue to be made at MSP as floor price, exchanges should be able to offer market based options at strike prices higher than the MSP. Be able to offer market based options at strike prices higher than MSP. Budget fails to meet the expectations of participants in the commodity future markets as the needed reforms facilitating the growth of commodity markets have been avoided. Introduction of Commodity Transaction Tax (CTT) on line with Securities Transaction Tax (STT) is a negative move for the commodity market when market is still evolving seeking larger participants and volumes. Moreover, the long and short term capital gains benefits extended to securities market has not been extended to commodities trading. On the other hand, the decision is significant in the wake of commodities markets regulator to institutionalize the development of market mechanism, support institutions capacity building and development of strong forward and backward linkages between market, producers, traders and consumers and the Forward Markets Commission receiving more autonomy to deal efficiently with the challenges facing the commodities futures markets with the approval of Forward Contracts (Regulation) Act, and Foreign Direct Investment (FCI)/ Foreign Institutional Investors’ (FII) Investments in commodities sector.
It showed an increased interest of the government in expanding the commodity futures markets in line with the equity markets. Securities markets are eight times larger than the commodities market and hence the levy is premature. The functioning of securities markets is different from that of commodities markets. Commodities markets are global asset class and trade flowed to the most efficient markets that bore the least cost of trading. Commodity markets are still in the nascent stage (4years old) and a fraction of the size (1/5th) of the securities markets. It would increase the cost of trading by at least four times. Future trading in wheat, rice, tur and urad had already been suspended by the FMC. Efficient functioning of futures markets pre-supposes the existence of efficient spot markets. Currently, physical spot markets have large numbers of infirmities. It will be difficult for the futures markets to function till these are removed. Commodity markets in India need structural changes for increasing depth and curbing of speculative activity. Banks, FIIs and other institutions should be permitted to trade in the commodity markets. National Commodity spot markets need significant legislative and administrative support for taking off. Banks, FIIs and other institutions should be permitted to trade in commodity markets. Commodity options need to be developed. The setting up of national electronic exchanges by the national commodity exchanges is an attempt to create a national integrated market. The vibrant agriculture markets including derivatives markets are the frontline institutions to provide early sign of future prospect of the sector. Vibrancy in these markets gives signal about commodities which deserves flow of investment. All the regulators operating within the commodity markets scope work in cohesion.