Sebi extends futures trading ban on seven agri-commodities till Jan 2025

The suspension in futures trading for the seven commodities was initially set to expire on December 20, 2024

The Securities and Exchange Board of India (Sebi) has extended the suspension of trading in derivative contracts for seven agricultural commodities until January 31, 2025.

 

According to a late-night notification, the suspension in futures trading for the seven commodities — paddy (non-basmati), wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil, and moong — was initially set to expire on December 20, 2024. However, just a day before the expiry, the suspension was extended.

 

Trade sources noted that, unlike in the past, this time the extension has been made for a little over a month, giving hope that futures trading in some agricultural commodities, particularly those in the edible oil complex, might resume in the near future.

 

 

In December 2021, Sebi first announced the suspension of derivatives trading for five commodities or commodity groups (wheat, soybean, crude palm oil, paddy, and moong) for one year. In addition, chana and mustard seed/mustard oil futures contracts were suspended on August 17, 2021, and October 8, 2021, respectively. Since then, the market regulator has regularly extended the ban, with the last extension valid until December 20, 2024.

 

Sebi’s press release did not specify the reasons for the initial suspension or its subsequent extensions. However, it is widely believed that the suspension aimed to curb rising commodity prices.

 

Recent studies by academicians from reputed institutions such as Birla Institute of Management Technology (BIMTECH), Vinod Gupta School of Management at IIT-Kharagpur, and Shailesh J Mehta School of Management at IIT-Bombay have uniformly found that retail prices for none of the suspended commodities fell after the suspension of their futures trading. In contrast, volatility in many of these commodities increased significantly, indicating that retail prices were influenced more by domestic and international demand-supply dynamics than by futures trading.

 

The studies also highlighted that, without futures contracts, Farmer Producer Organisations (FPOs) cannot hedge against price fluctuations, leaving them vulnerable to market volatility.

 

“Commodity exchanges play a crucial role in addressing these issues by providing training, warehousing facilities, price anchors, quality checks, and better bargaining power,” the BIMTECH study stated.

 

The BIMTECH and IIT-Kharagpur studies focused on soybean, soya oil, mustard seed, and mustard oil, while the IIT-Bombay study examined the impact of suspension on mustard, refined soy oil, soybean, chana, and wheat. The BIMTECH study also revealed that the retail-to-wholesale price difference increased during the post-suspension period compared to the pre-suspension period. For mustard oil, the difference rose to Rs 11.97 from Rs 9.22.

 

The lack of domestic hedging options has forced hedgers to turn to international futures markets, exposing them to basis risk — the residual risk arising from differences between spot and futures prices due to varying influencing factors.

 

The IIT-Bombay study further found that the suspension led to increased volatility in mandi prices for mustard seed and soybean, with daily volatility rising from April 2021 onwards. The analysis also debunked the presumption of a positive relationship between commodity futures trading and food inflation, finding no evidence to support this claim.

 

“Retail prices remained high for most of the suspended commodities as well as their unsuspended counterparts during the suspension period,” the study noted.

 

Additionally, the study highlighted the bi-directional relationship between futures and spot prices, showing that futures markets played a significant role in price discovery by signalling directionality to spot markets and vice versa. The findings emphasise the importance of exchange-traded commodity futures in maintaining market efficiency and stability.