Can suspending commodity derivatives rein in food price

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Can suspending commodity derivatives rein in food price

Friday, 24 January 2025 | Sanjay Rawal

Can suspending commodity derivatives rein in food price

The debate over whether speculative trading in futures commodity markets drives food price inflation remains unresolved in India and across Asia

While there are several concerns in India and across Asia, certain policy and key opinion circles that food price inflation is catalysed or influenced somehow by speculative trading in the futures commodity markets. Even while opinions are divided in policy circles and among economists who have studied and examined the nature of the relationship between food inflation and commodity and derivative futures trading contracts, and no empirical evidence hitherto seems to have been found despite numerous studies undertaken in India.

It would be worth mentioning that a detailed empirical research study conducted by leading researchers from the Indian Institute of Management Udaipur specifically studied three suspension events in India of futures traded commodities, which led the researchers to firmly state that the counterfactual for each of the examined episodes confirms that even in the absence of trading suspensions, food prices or inflationary trends would have followed their dynamic path.

Any upward price volatility could ostensibly be the effects or countereffects of various extraneous domestic or global (especially geopolitical) factors. It is also equally understandable and natural for any governing policy institution to be both fully cognisant and mindful of food price inflationary trends, and the fact that rising food prices can have a cataclysmic effect on food security and thus, by extension could have substantive socio-economic impact.

Successive policy establishments and ecosystems have always been overly cautious, ever since futures trading commodity derivatives exchanges were established in the early 2000s. Despite the mandate of such commodity exchanges that futures trading contracts encourage effective and fair price discovery and risk hedging, which consequently safeguards the commodity value chain from price risk which is a result of a fundamental play between demand and supply the apprehensions concerning these market-driven tools continued to remain, manifesting itself the way of multiple instances of suspensions on certain commodity derivative contracts.

While trading suspensions have been a constant feature since 2007-2008, under the advisement of the price monitoring mechanisms and agencies within the government policy ecosystem, there never has been an occasion when suspensions of commodity trading exceeded more than a year in a single stretch, barring the odd ‘sensitive’ food commodity. So as a commodity markets expert, with a domestic and world view of ongoing trading in global commodity markets, one begs to specifically ask - Do derivatives trading suspensions really rein in food price inflation?

Researchers have constantly alluded to synthetic control methodologies to apply to their studies for studying specific suspensions, their findings fairly and comprehensively conclude and determine that there is no empirical evidence that derivatives suspension had any impact whatsoever on food prices.

On the contrary, from specific instances studied, such as those of Bengal Gram (Chana) in August 2021 and Mustard Seed Derivatives in October 2021, analysis from the said report from IIM Udaipur shows that prices of both commodities, Chana and mustard oil, would have continued on the same price trend path even without the suspension.

To specifically quote a potent segment of the said study – it clearly articulates that the conducted research does not find any role of futures market trading on price changes, nor does it find any empirical evidence of the impact of suspension of trade on price behaviour in the period after suspension. Rather, the analysis shows that prices of commodities such as mustard oil would have had a similar trend even without the suspension. Furthermore, the study finds that before the suspension futures market had a dominant share of 64 per cent in discovering the true and fair price of the mustard seed commodity derivative.

The study goes on further to articulate that commodity derivative suspensions hurt genuine participants discourage the growth of domestic agri-derivatives markets and resultantly impact the growth of price hedging prospects of the commodity value chain including CBBOs (Cluster Business Organisations) and FPOs (Farmer Producer Organisations), while consequently hurting the value realisation and income levels of farmers.

It also adversely impacts India’s position in providing a global price benchmark, despite the country being a major producer and consumer of several agricultural commodities. Needless to say, as an active observer of the Indian agri-based commodity trading ecosystem, it behove advocacy and argument that summary commodity suspensions as a method to arrest or contain food price inflation should not be adopted and further the suspension of futures trading contracts of agricultural commodity derivatives must be revoked. In closure, one must say emphatically that the development of the agri-derivatives market is supported in India, which in turn will lead to fair price discovery and transparent hedging of price risks, eventually creating a positive socio-economic impact for farmers and the agri-ecosystem in India.

(The writer is national president of Commodity Participants Association of India; views are personal)

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