Agri futures have failed in price discovery: Experts

MARKET WATCH

The ban on futures trade in pulses such as tur and urad has once again brought to the fore the issue of true price discovery from futures trading.

Phenomenal success of futures trade in the country has generated big hype among foreign investors and the ban will leave a bad impression on the domestic agricultural futures market.

"In the morning, agri commodity futures were down across the board fearing a repeat of the ban on other commodities," said a futures trader, adding, "Trading in agri commodities futures will always be risky, as some circles, including Parliamentarians and guar gum exporters, have been opposing it since the beginning."

Agricultural commodities have always remained politically sensitive in the country. Even today, state governments are imposing stock limits on commodities such as wheat.

After a Parliamentary committee recommended ban on futures last May, the Forward Markets Commission (FMC) has imposed many restrictions on agri commodities futures.

Exactly a year ago, the FMC had taken action against the NCDEX for changing terms of contracts in chana and urad without prior permission of the commodities market regulator.

"All these are happening because the true price discovery mechanism has failed," said an expert in commodities, who also advises the government on many key issues.

Currently, there is heavy speculation in thinly traded commodities, which are mainly agri commodities. The settlement is virtually on the basis of cash, though delivery does take place in some cases.

The international benchmark shows that only 1 per cent of the futures deals result in delivery. Price discovery will happen only if futures contracts are settled in deliveries. Hedgers are in favour of delivery-based trade. If the market is deep enough, only then can goods be delivered at the time of settlement.

However, if settlement is based on cash, those opting for delivery will end up paying a high price when buying goods from spot market. Similarly, sellers may end up getting a low price, as they will not be able to deliver goods in futures settlement.

In the absence of such an efficient mechanism, heavy speculation is going on in agri commodities futures. Since January, the FMC has made settlement compulsory on the expiry of contracts, resulting in smooth trade settlement on the NCDEX.

Experts have been advocating a foolproof mechanism to set right futures trade in the country. "We have a system of warehouse receipt and it helps in smooth delivery. Till date, we have transacted 50,000 such receipts issued by Central Warehousing Corporation," said Kailash Gupta, managing director of the Ahmedabad-based online exchange, NMCE.

It would take a while before a true price discovery mechanism in agri commodities futures would be established, opined experts.