Comexes split over agri futures trades

Spot traders say futures distorting spot market prices

Commodity exchanges are divided on the issue of futures trading of narrow commodities even as the regulator, Forward Market Commission (FMC), is keeping a close tab on the development.

Narrow commodities, produced in certain regions of the country, comprise guarseed, mentha oil, isabgul, turmeric, cardamom, cumin seeds among others.

Spot market traders are protesting futures trading of these commodities as they feel that price discovery in the spot market is being distorted owing to unusual higher prices for far-month futures.

For instance, if the December futures of a particular agri commodity is quoted higher, farmers presume that selling in that month would fetch more money and, hence, they hold on to the stocks. This, in turn, ramps up the spot prices.

Turmeric prices in the spot market today is about 25 per cent lower than its three-month futures. As traders are quoting a higher price for futures, farmers are not willing to release stocks in the spot marker as they would prefer to wait and realise a better prices three months down the line.

Last year, cardamom prices hit the roof in both futures and spot markets. Following this, farmers aggressively cultivated cardamom. This backfired as an over-supply of the commodity led to a decline in prices this year.

"We must stop futures trading for narrow commodities. Globally, there is no futures trading for any commodity which does not have any international benchmark," said an industry source.

The Multi Commodity Exchange of India (MCX) feels futures beyond two months should be banned, while the National Multi-Commodity Exchange (NMCE) and National Commodity & Derivatives Exchange (NCDEX) are in favour of continuing narrow commodities futures trading.

"Regional commodities with sectoral influences should be handled with extreme care and sensitivity. Far-end futures of such commodities should be removed immediately and futures should be permitted for two months only as farmers take those prices as benchmark and trade in physical market," said Jignesh Shah, MD, Multi Commodity Exchange of India (MCX). However, Poonam Gupta, assistant vice-president (marketing) of NMCE, said there was no need to close futures trading but it (trading) should be done in a transparent way.

A source in NCDEX said regional commodities offered price discovery on an organised trading platform and there was nothing wrong about it as fair price discovery depends on the design of a contract and not the regional character of any commodity.

Industry sources also cited lack of transparency in spot trading. "The polled prices (collected over phone) quoted by exchanges may or may not match with the trade price in the physical market and, hence, there is always room for price rigging in spot market. If the spot prices are transparent, then there is no need to ban futures," said a source.