Recommending Banning of Commodities' Future Trading

(Dr. krishan Bir Chaudhary)

Futures trading in wheat, rice and pulses like tur and urad has been suspended by the Forward Markets Commission as it caused market manipulation, leading to a rise in prices. But, still, futures trading is
being carried out in a number of agricultural commodities.

The government knows for certain that futures trading in farm commodities is the cause for market manipulation. Finance minister P Chidambaram, while presenting Budget 2008-09, slapped a commodities transaction tax (CTT) on options and futures on the lines of the existing securities transaction tax.

"The commodity futures have come of age in the country and should be treated at par with the equity market," he had said. Chidambaram also brought the commodity futures exchanges in the ambit of service tax. These measures were aimed at curbing manipulation.

But the government's move is only a piecemeal approach although it has realised the damage futures trading in agricultural commodities can cause. It should nip the problem in the bud by banning futures trading in all agricultural products.

There is a wrong notion that the farmers are benefiting from the existing futures trading in the country. The farmers get the lowest price for their produce in the season at harvest and, thereafter, the produce passes into the hands of traders and corporate houses that manipulate high prices for commodities in the futures Markets. Farmers have no opportunity to participate in this.

The Economic Survey 2007-08 clearly says: "Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margining and high membership fees … work as a deterrent to farmers' participation in these Markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers."

Farmers have no time to participate directly in the futures Markets. They have to prepare the field after harvest for the next crop. The concept that institutions or corporate houses should act as aggregators on behalf of farmers amounts to leaving the peasants at the mercy of these marketing giants.

The government has now gone into a panic mode as inflation, as measured by the point-to-point movement of the wholesale price index, reached a 40-month high at 7% for the week ended March 22, 2008. Yet, it is not totally critical about the neo-liberal architecture of the Economy that it has imposed upon the nation.

It is taking a piecemeal approach like banning exports and liberalising imports of certain commodities. It is time the government rejected this neo-liberal and corporate -led agriculture model and replaced it by a farmer-centric one.

There is no shortage of food either at the global or at the domestic level. According to a recent report of the International Grain Council (IGC), the world wheat production would be at 646 million tonne (mt), an increase of 42 mt over the previous year, due to a 2.5% increase in the area under cultivation.

The global prices of maize were around $240 a tonne by March 27. The IGC forecasts global maize output to decline by 20 mt to 748 mt. Barley output would increase 10% to 148 mt.

According to the official estimate, India has achieved record grain production of 219.32 mt in 2007-08, including 94.08 mt of rice, 74.81 mt of wheat, 36.09 mt of coarse cereals, and 14.34 mt of pulses. The cotton output is estimated at 23.38 million bales of 170 kg each, an all-time record. The oilseeds output is estimated at 27.16 mt.

Despite the good production, there is a deliberate manipulation of food prices both at the global and at the domestic levels. At the global level, there are a few corporate players in the food business that buy produce from farmers cheap, hoard the stock and manipulate the prices. The bio-fuel programme in Europe and the US is also a contributing factor to price rise.

In India, too, the corporate houses and retail chains have been allowed to buy produce from farmers, hoard and manipulate the market. The farmers do not gain in the process as they are paid relatively lower prices than what the corporate houses quote on the futures exchanges or in the spot market, or at what the retail chains sell to the consumers.



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