To curb rising food inflation, the Securities and Exchange Board of India (Sebi) has barred exchanges from launching new futures contracts in seven food commodities including Soybean and its derivatives, which is the most important protein source for the feed industry. Though leading industry players and associations held various meetings with government bodies to get this banned. Still, the prices are either firm or increasing even after the ban. So, who is likely to benefit and who is at loss? To understand this further, Think Grain Think Feed connected with commodity experts – Dr Raosaheb R Mohite, GFFM Group and Ms. Prerana Desai, Sammunati, and other experts. Below are the excerpts.
Before NCDEX and after NCDEX – procurement for the feed industry.
Dr Raosaheb R Mohite: The government decided to suspend with immediate effect trade in key agricultural products on the exchanges for a period of one year starting 20 December 2021. The objective was to not let speculators drive up the prices and in turn impact price rise for consumers. However, from the limited data available as of date, shown below, the objective was hardly met or intended results were very limited (the data downloaded from the NCDEX website).
The spot and futures prices of Soybean dropped soon after the government announcement by approx. 4 % or so (Fig 1 and Fig 2). But this remained for a very short time period maybe 2-3 days, the prices recovered thereafter and moved up instead of holding on to the lower level or continuing to drop. It indicates the intended results of a longer period of reduced prices were not achieved by this government action.
Prerana Desai: Indian industry is not yet a mature industry. Hence the Feed sector did not have any direct product that they could hedge on. Soybean was a proxy hedge product. This was lost once the futures were banned. The spot prices on the other hand have remained steady to firm. The way global markets are going the prices are expected to stay firm. Farmer resistance is due to the lower seed prices, and they are selective sellers, due to very low carry forward from the previous season they continue to dictate the prices. Due to lack of crush parity and low oil share crushing mills are running way below their capacity, in turn keeping the problems of feed sectors alive despite the futures ban.
Your viewpoint on NCDEX ban for the Soybean future – how will it impact the Indian feed industry and farmers?
The Indian feed industry depends heavily on Soybean and Soymeal as a source of reasonably priced high-quality protein will find themselves deprived of an excellent marketing platform – for buying at a fixed price of required quantities for supply at a future date or as per production/consumption need. The consumers lose out on real benefits of the derivatives trade on national exchanges, specifically, the real-time price discovery, the mitigation of price risk through hedging, and the help with yearlong and long-term business planning. Futures trading also guarantees a continuous supply of raw materials without having to go for large-scale procurement and storage of inventories, which necessitates, the raising of substantial working capital or funds.
As above, the recent decision to suspend trading in agri-commodities on exchanges did depress the Soya Meal prices temporarily before bouncing back in 2 – 3 days (Fig 3).
The Indian farming scenario is filled with a large number of small and marginal farmers. Most of them are happy to sell off soon after harvest at whatever or the best possible price at the time of peak harvest as they require immediate cash for necessities and remaining depending on their financial conditions can wait for a better price realization in the off-season.
Other reasons include large contract size, lack of proper storage structures, and lack of awareness and insights into trading on commodity futures exchanges. However, as observed, farmers actually get benefited indirectly by real-time price discovery taking place on exchanges. Rather he tries to sell at a price close to higher than the prices on the exchanges, which are easily and freely available in a number of online and offline ways from exchanges and other support information sources.
The other key benefit that the farmer loses out is ‘easier’ access to credit that he gets by storing on exchange approved modern warehouses which issue warehouse receipts that banks and other financial institutions are more likely to honor as collateral. This is an important incentive for farmers to sell on an exchange which has been made further attractive by the interest subvention scheme that the Centre has announced. Also, selling on the exchange takes care of farmers’ marketing problems and risks due to price volatility.
Prerana Desai: NCDEX can at best be described as a messenger. By banning the future only thing that has been done is of killing the messenger. Now everyone is lost farmers, millers and the users as to where the prices go in next 2-4 months. Any business sustains on the clarity of view spot as well as future, that clarity has been lost. Everyone is at a mercy of the spot market, and the fact remains that spot markets are also in the hands of few, due to lack of transparency the speculation tends to benefit the few who are spreading it.
How can it impact our position in the international markets?
The sudden policy decision, of suspension of trading in key agri commodities on exchanges, can have serious consequences in Indian as well as international markets. The trade in agri-commodities in India is still developing or not yet mature as of other developed markets or economies. Even though a large number of agri-commodities are listed on Indian exchanges, only a few commodities which are relevant to producers and consumers enjoy liquidity. There is also a large number of participants in the commodity traders who depend on Indian commodity exchanges and international commodity exchanges for effectively managing their price risk and supply or procurement. The ecosystem of brokers, online traders, aggregators, importers, exporters, government agencies who are entrusted with procurement, distribution, and food security are all going to be dependent on exchanges both in India and abroad. Only this can make them competitive and in turn, benefit the producers and consumers.
It is not an exaggeration if we say that international trade is an essential component of the commodity trade and it facilitates greater trade among countries and takes care of gluts and shortfalls in the commodity supply chain in an efficient market mediated system. Integration of the country’s commodity exchanges with international commodity exchanges benefits not only the Indian farming community but also the international farming community.
Another important reason is the need for having stability and trust in the commodity marketing system. The suspension in trade invariably results in losses to participants who have an existing position on the exchange platform. They will be forced to close their position or would be automatically terminated at the end of the period. This will not bode well as liquidity is essential for the stakeholders to reap the benefits of participation on the exchanges. It has been the experience that the return of existing players, once the trading in these suspended commodities is reinstated, is not automatic. The stakeholders will wait and watch and venture in only slowly delaying the process of liquidity (essential for finding a buyer for every seller and a seller for every buyer – one of the most important elements of commodity futures exchanges).
Your suggestion for Policymakers.
The trading on commodity exchanges has had a long-chequered past. Only recently, since 2003, the national level electronic commodity exchanges were set up. During the last 20 years or so, it has done very well to gain momentum quickly with a large number of agri and non-agri commodities being traded on these exchanges. This has made it possible to get a real-time price discovery and helped producers, consumers, and policymakers in taking business decisions. To their credit, the Indian exchanges have done very well in trading a number of commodities and directly or indirectly influencing prices across the globe. However, this has been the case for the most part in non-agri commodities.
The agri commodities have been beset with a variety of challenges due to complexities in trading, including the perishable nature of the commodities, production of smaller quantities by a large number of growers spread across the country, need for specialized warehousing practices, logistic issues, the unpredictability of production, yield, etc. Further, some of the existing policies such as the essential commodities act, limits on storage by the trade, on and off export and import curbs, etc have led to lots of uncertainty, and markets have been unable to function freely or forces of demand and supply that play a very important role in price discovery are affected. Past experience of suspension of trade on exchanges of Wheat, Chana, etc has led to further instability and uncertainty, and loss of trust among the participants. The liquidity in some of these commodities which were showing slow positive growth experienced a huge setback and it took several years for them to recover. The announcement of the latest policy by the government of suspension of trading in some of the key agri-commodities is likely to again set back the industry by years.
The question in front of the stakeholders including the government is ‘can it have been avoided?’. The answer is not simple and it is argued that the government could have managed the consumer price rise through a combination of measures. It may include bringing about changes in exchange operations like increased monitoring and surveillance of day-to-day trade and curbs on speculators (speculators cannot be avoided as they play an important role in the functioning of the exchanges). Reducing the impact of price rise on consumers by temporarily offering sops or subsidies, until the prices and markets are stabilized.
As per the opinion of experts in the industry, it is considered that policymakers should not make decisions that may benefit in the short run but can have deleterious impact over the medium term, and even sometimes in the long run. Especially when commodity trading on national electronic platforms is an efficient, cost-effective, and transparent process that benefits the industry and the economy positively.
Prerana Desai: Exceptional circumstances are part and parcel of the agriculture commodities, because of the smaller seasonal cycles and increasingly irregular weather. The government needs to stay ahead of the cycle anticipate and act on time to diffuse the volatility. Exchanges need to have stronger internal mechanisms to curb unnecessary volatility.
A leading poultry industry player who declined to be revealed due to confidentiality reasonssaid, this ban can have varying impacts on the Indian feed industry while this year it is negatively impacting. In absence of future trading, farmers are not clear about the demand and still holding the crop. Even after the ban, prices are either firm or increasing.
Poultry Federation of India, has been involved in the discussions, thinks this has positively impacted the sector, as after this ban prices are more or less firm. Though the situation would be clearer in the coming months.
Another feed miller based out of Haryana is also positive about this decision as according to him the speculators were responsible for increasing prices of commodities and with the ban in place, the industry gets some relief.
The question is how the industry would hedge and who would guide them for risk management.
 If small and marginal farmer does not have enough quantities to meet requirements as per contract specification, he can then pool his produce with other farmers of FPO or Cooperative and sell on exchange to gain from several of the benefits that exchanges offer.
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