Agricultural commodity prices remain strong despite suspension of futures trading

suspension derivatives Trade in seven essential agricultural commodities in the last three years has led to an increase in the prices of these commodities due to the absence of a transparently discovered reference price.

Market regulator in 2021 SEBI there was first Futures trading of seven commodities was suspended – including non-basmati paddy, wheat, chana, mustard seed and its derivatives, soyabean and its derivatives, crude palm oil and moong (green gram) – for one year to combat inflation and was later extended twice in the last two years.

Two independent studies conducted by Birla Institute of Management Technology and IIT Bombay Shailesh J Mehta School of Management said that the absence of a reliable reference price in the physical market has led to higher price discrepancy between mandis.

• Also read: Chana, wheat, mustard and jowar reduced rabi cultivation area in India by 7%

The Birla Institute examined data from January 2016 to April 2024 for mustard seeds, soya beans, soya oil and mustard oil and found that retail consumers paid higher prices for these products in the post-suspension period.

IIT Bombay study on mustard seed, soya oil, soya beans, chana and wheat in Maharashtra, Rajasthan and Madhya Pradesh highlighted the fact that futures contracts on these agricultural commodities serve as an important tool for price discovery and price risk management for farmers/ Farmer Producer Organizations and other value chain participants.

Prof Prabina Rajib, Director, Birla Institute of Management Technology, said periodic suspension of commodity derivative contracts is a recurring theme in India, but commodity exchanges across the world continue to offer uninterrupted commodity derivative contracts even in the face of supply-demand mismatch. price differences.

He said the belief that derivatives futures trading led to price inflation may have been misplaced as retail and wholesale prices not only increased across categories in the post-suspension period, but retail consumers paid even higher prices.

• Also read: Onion exports restart after a 2-month break

Shailesh J Mehta School of Management Associate Professor Prof Sarthak Gaurav said retail prices of commodities are affected by demand and supply factors rather than price movements on derivative exchanges.

He added that the suspension of commodity futures trading has adversely affected price realization due to the absence of reference pricing mechanism and impaired price risk management of commodity value chain participants.

The government should use these tools to help farmers manage price risk by actively participating in the derivatives market, thereby increasing volumes and improving market confidence.