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Informist, Wednesday, Dec. 18, 2024

 

By Afra Abubacker and J. Navya Sruthi

 

NEW DELHI/MUMBAI – The ban on trading in futures of seven commodities, first imposed in 2021, will expire on Friday, unless it is extended further. But even if the ban is lifted, regaining market participation will be challenging and time-consuming for the exchanges.

 

"We are waiting with fingers crossed. If there is no circular by Dec. 20, then it (suspension) will lapse," a top official at the National Commodity and Derivatives Exchange told Informist.

 

In 2021, the Securities and Exchange Board of India suspended trading in futures of non-basmati paddy, wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil, and moong, ostensibly to combat rising inflation. The ban was extended consecutively each year till December this year. However, exchange officials, citing studies, said that prices of agricultural commodities will remain volatile as they are driven by demand-supply factors in the domestic and global markets.

 

"A lot of traders have gone out of the market. They are trading in other commodities or gone into equities," the NCDEX official said. Before the suspension, NCDEX had 357 registered members in 2020-21 (Apr-Mar), which declined to 250 members in FY24. Over the same period, the registered farmer-producer organisations dwindled to 60 from 322. The average daily trade volume fell to INR 8.48 billion from INR 12.7 billion, NCDEX data showed.

 

Of the seven suspended commodities, the exchange hopes to regain participation in oilseeds if the ban is lifted.

 

A top executive at a fast-moving consumer goods company said political compulsions may prevent the government from resuming futures trading, as soybean prices are below the minimum support price and the index will show the reality.

 

Satish Upadhyay, secretary of the India Pulses and Grains Association, feels otherwise. He said there are chances that the government may allow futures trading in oilseeds like soybean whose prices are below the minimum support price due to high supply. Lifting the ban will support prices.

 

On the other hand, production of chana, tur and moong this year is not up to the mark and due to lack of adequate carryover stocks, and allowing futures trade may inflate prices, Upadhyay said.

 

VOLUMES

Market participants said volumes could pick up if there is assurance on policy continuity if the ban is lifted. However, analysts believe that recapturing the market will be a time-consuming process. "Frequent suspensions broke the sentiment. It will take time to recapture the market. Around one or one-and-half years will be needed to regain the pre-suspension volume in mustard and soybean," Ravi Shankar Pandey, senior analyst at SMC Global Securities, said.

 

According to NCDEX's FY22 annual report, the edible oil complex accounted for 46% of the turnover in value terms, with refined soy oil being the largest contributor at 18% and soybean at 12%. This was despite these contracts not being available for trading for around two quarters of 2021.

 

However, volumes in wheat contract were low as there was uncertainty and fear about stock limits and the government banning derivatives trading, said Ajay Goyal, managing director of Shivaji Roller Flour Mills Ltd. Government assurance will encourage trading and drive volumes, he said.

 

"I do see that there are a lot of participants in the market, particularly from the FMCG space etc., who are users of the commodity. They would definitely love to have a benchmark index functional and volumes will also come. The reason why usually these indexes have never elicited good volumes in the past is the fact that there has been a switch on switch off approach to this," the executive with the FMCG company said.

 

"People will come. They have no choice. And there is a long-lasting demand for hedging and investing," SMC Global's Pandey said. The edible oil industry will welcome the relaunch of oilseed and its derivative futures, he said. "Seeing the current scenario, more participation will come from refiners," he added.

 

NCDEX's PERSEVERANCE

Though NCDEX has lost 70% of its product basket due to the suspension, the exchange has not given up on outreach programmes. "We had a record 877 outreach programs this year. It is important to stay relevant, and outreach is the way," a senior NCDEX official said.

 

According to the official, the exchange has been getting good response from farmers and farmer producer organisations. However, onboarding brokers remains challenging as they seek certainty of seamless trading opportunities, which the exchange falls short of.

 

Moreover, no new-age broking houses offer recommendations on farm commodities, the official said. Also, very few broking houses are developing apps and other technology for agricultural commodities as their turnover from these products has come down considerably, the official said.

 

According to studies, derivatives trading and exchanges develop the market ecosystem by bringing in price transparency through participation across the value chain. Exchange assaying system and warehousing also improves the quality of the delivered commodities. Officials said derivative trading also helps farmers make informed decisions on what to produce as they have price visibility for the coming months.

 

Currently, only a handful of broking houses actively track and give trading calls on agricultural commodities. "Once the product basket increases, more broking firms will come," Pandey said. He highlighted the future and scope of agricultural commodities citing the booming agri startups and e-commerce ventures.

 

NCDEX plans to launch options and mini-contracts in commodities available for futures trading to ensure wider participation, the officials said. Last month, the exchange launched options on futures contracts for guar gum, which is doing well.  End

 

Edited by Ashish Shirke

 

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