The Economic Survey has recommended keeping sensitive commodities such as rice, wheat and most pulses outside the ambit of the futures market until the markets are developed and the regulator has a higher degree of comfort in diversifying the portfolio.
The agriculture futures market should focus on less sensitive commodities such as oilseed complex (oilseeds, meals, and oils), feed (maize), cotton, basmati rice and spices, it said.
The commodity futures market can effectively contribute to price discovery only when many consumers, producers, traders, and aggregators use these markets to hedge their risk. The interplay of these participants, speculators and arbitrageurs provides liquidity and helps price discovery for longer periods.
Countering inflation
However, given that most farmers are marginal with fragmented land holdings, they are often left without the necessary wherewithal to participate in these markets effectively, leading to reduced depth in the commodity futures market.
Further, the survey said it is also observed that the requirement of standardised exchange contracts with specified quality parameters and delivery requirements has also impeded the majority of farmers from effectively engaging in the commodity futures market since farmers produce different varieties of commodities in widely varying qualities due to varied geographical, weather and soil conditions.
Additionally, periodic bans imposed by the Government of India on futures trading on agri commodities as one of the measures to counter food inflation have also had implications on the traded value and price volume in commodity and derivative exchanges, said the survey.
FPOs role
Once the regulators provide clear direction regarding the choice of commodities for derivatives trading, they must stay the course by adopting a stable policy with minimal interventions.
Farmer Producer Organisations (FPOs) can play a significant role in effectively linking small, dispersed farmers and the Commodity markets eco-system. The role of Government, SEBI, and Commodity Exchanges in promoting FPOs in various segments of agri-commodities across the country is pivotal.
As the depth and liquidity in the agri-derivative market increases in the long -run, banning futures trading may no longer be required to stabilise prices unless there is data backed evidence of futures trading driving up price volatility.
The regulator should closely watch the futures market and undertake regular reviews given the fluctuations in domestic production, consumption and global trade, said the survey.