Metals take sheen off agri futures

Despite a huge arbitrage potential between spot and futures markets, traders are hesitant in continuing their activities in agri-commodities.

A large number of agri-commodity traders has shifted to global commodities, such as base metals, gold and silver.

Trading in agri-commodities, especially sensitive commodities such as wheat, has hit traders with their futures prices selling at a discount to their spot prices.

Wheat futures are offered at a 20 per cent discount to the spot prices, which, experts said, is not a healthy sign.

Analysts pointed out that the FMC directive on declaring the intention to make delivery five days in advance may have pulled down the futures prices.

In the case of wheat, some sellers, it is believed, would have squared off the deals after five days by paying penalty.

The spot price of new wheat on the Ncdex on December 20 settled at Rs 1,084.80 a quintal, which is comparable to the spot prices in Delhi at around Rs 1,100 a quintal.

In comparison, the new wheat futures for December delivery closed at Rs 921 a quintal on December 20 on the Ncdex.

Analysts see no reason why the situation reversed in the last five months, when the futures prices began ruling lower than the spot prices, following the government's intervention to announce wheat imports.

The futures prices started easing in August after crossing the Rs 1,100 a quintal barrier after the Centre announced free imports by private traders.

"Today's wheat prices are not reflective of the true objective of permitting this sensitive commodity for futures trading. In fact, the futures prices should be the mirror of crop condition, estimated output, demand-supply gap, etc, which is totally absent from the prices at present," an analyst said.

Futures prices of wheat do not truly reflect the purpose of putting this commodity for price discovery, he added.

Futures prices of any commodity is determined with the supply situation in the spot market and anticipated exports or imports at the point of expiry of the contract or delivery.

"Considering the case of December contract on Ncdex, when no supply took place nor any supply glut took place through imports, the futures prices settled higher on the date of expiry of

December contracts," said Ajay Pathak, product head, wheat, at Kotak CSL Research.

There are cases such as disparity in quality of goods, expiry issue, nature of delivery, etc, when futures prices are discounted.

A Jaipur-based trader claimed to have lost huge amount by major traders in Rajasthan in December wheat contract because of taking a long position.