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BUSINESS
Is speculative trading responsible for commodity price hike?
Devajit
Mahanta
As lot of reasons have been cited for the steep hike of essential
commodities during the past few months. Depreciating Indian money against
the dollar, and vagaries of weather, besides stubborn and greedy oil
companies. But recently, the reason cited is ‘commodity market speculator’.
Addressing the energy ministers’ meeting in London, India’s
Petroleum and Natural Gas Minister Murli Deora said the current pandemonium
in oil prices lay in speculative trading in the futures market. There is a
need for the oil industry to re-assert its leadership in price formation
and not remain passive speculators. But we should not forget that a small
proportion of oil production is traded in the futures market. Global oil
sales at current price levels amount to about $4.3 trillion. The futures
market accounts for only $260 billion.
The Standing Committee on Food, Consumer Affairs and Public Distribution
(Government of India, 2006-07) seeking amendments to the Forward Contract
(Regulation) Act had stated that since small farmers do not participate in
commodity trading, there is no need for these markets. World over,
commodity futures market are used by large farmers, traders, banks and
insurance companies. They are allowed to participate in futures markets, as
they can hedge their exposure to farmers and give better terms to them. The
fundamental inadequacies in the system cannot be covered by banning futures
which seeks to protect consumer at the expense of the farmer.
The Government of India in 2007 and 2008 imposed a temporary ban on futures
trading of tur, urad, channa, soy oil, potato, rubber, wheat and rice
citing futures trading as a source of inflationary pressure on spot prices.
As per the 2006-07 Economic Survey report, the average daily turnover of India’s 25
commodity exchanges put together barely crosses Rs. 8000-9000 crore.
Of this, the share of fine cereal grains (wheat and rice) is insignificant,
ranging below Rs.30 crore per day, while tur, urad, channa, soy oil, and
potato accounted for the share below 15 percent. Also in the case of urad,
urad futures have been lower than the spot prices for over five months just
before the ban. If the logic that futures prices or speculative trading
affects spot prices is true, then spot prices should have come down, which
did not happen as supplies are weak. India produces 70 million
tonnes of wheat per year and only 20,000 tonnes are traded in the commodity
exchange.
Hence it is highly improbable that speculative trading in the commodity
exchange could have any significant impact on price of wheat. We observed that
of the four banned commodities like channa, soy oil, potato and rubber in
2008, only the price of potato declined after the ban due to the bumper
crop. Given the insignificant volume of trading in commodity futures of all
the recently banned commodities, it is rationale to assume that futures
trading cannot and do not have any direct contribution to their price rise
of such commodities. The bulk of inflation which is substantially caused by
commodities, specially fruits and vegetables, are not traded on our
commodity exchanges. Thus futures trading cannot be held responsible for
inflation.
One of the main reasons that speculators are playing in the commodity
futures market is that equity and other investment markets became too risky
after US
sub-prime crisis where already a large Pension and Hedge fund have
stockpiled. Several studies have revealed the scope for considerable
improvement in the regulation of the commodity trading market to curb
excessive speculative activity. There is a definite need to distinguish
between hedgers and speculators, and treat them differently in terms of
various requirements.
To understand the fact, it is necessary to examine the forces behind the
price rise for different commodities. In the case of food products, this essentially
requires a more determined effort to increase the viability of food
cultivation, expand and strengthen the public system of procurement and
distribution. Even for other commodities, public intervention and
regulation of market is essential.
(e-mail: devajitmahanta@gmail.com)
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