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Futures trade in agricultural items doesn’t lead to price changes: Study

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The suspension of futures trade in several agricultural items on the commodity exchanges last year have had no impact on the retail price volatility, according to a study conducted by three researchers, including one from Indian Institute of Management (IIM), Udaipur.

Stating that suspension from futures market is often justified on the grounds of speculative activity emanating from trade in futures market, the study titled ‘Assessing the impact of commodity derivative suspension’ has stated that it has not found any role of futures market trading on price changes. Nor does it find any empirical evidence of impact of suspension of trade on price behaviours.

“These points towards the lack of any impact of derivatives contract suspension on mustard oil prices,” the study which focused on two commodities – mustard and chana, has noted. “The analysis shows that prices of mustand oil would have had a similar trend even without the suspension,” the study said.

In the case of chana, the futures trade of which was banned in August last year, price volatility has been minimal post and prior to the imposition of suspension.

Detailed price movements and other information of mustard and chana was analyzed as their demand is largely met through domestic production.

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Since 2005, the government so far has suspended 17 futures contracts for curbing inflationary trend.

To curb inflation, on December 20, 2021, commodity exchange regulator Securities and Exchange Board of India had banned futures trade of wheat, paddy (non-basmati), chana, mustard seeds, soya bean, crude palm oil and moong for one year. Earlier, mustard seed and chana (gram) futures trade were suspended on October 8, 2021 and August 16, 2021

Stating that the suspension of futures trade such as mustard seed and other commodities discourages the growth of domestic agri-derivatives markets, the study has noted that the move prevents India from setting global price benchmarks, despite being the major producer and consumer of several agricultural commodities.

Calling for removal of a ban on futures trade for development of agri-derivatives market, the study has suggested that there should be strict market surveillance and effective enforcement, transparency and timely availability of information on trends in production and stocks, which removed fear of market volatility.

The suspension of futures trade hinders the growth in development of quality networks under the Warehousing Development and Regulatory Authority ambit which ensures transparency and traceability of stocks of agricultural commodities through electronic-negotiable warehouse receipt (e-NWR) issued to the farmers.

According to Vijaya Lakshmi Nandendla, joint secretary, ministry of agriculture, said that there is a need to create more awareness and understanding about the derivatives market where price risk can be hedged amongst key stakeholders including farmers in the agricultural value chain.

The study was carried out on behalf of NCDEX investors protection fund trust. The objective of the study was to assess the impact of various policy decisions on the development of the spot and derivatives market.

The study was carried out by Nidhi Aggarwarl, IIM, Udaipur, Tirtha Chatterjee, Jindal School of Government and Public Policy and Karan Sehgal from Universidad Carlos III de Madrid.

Crude oil may fall to Rs 6500/bbl, recession, rate hike talks may weigh on oil prices; adopt sell on rise

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By Royce Vargheese Joseph

WTI Crude oil futures ended the previous week 2.34% lower and closed at $84.76 per bbl as demand concerns once again took center stage. A strong dollar also added downward pressure on energy prices as it makes commodities more expensive for buyers holding other currencies. Better than expected CPI data from the US improved the conviction of jumbo rate hikes from the Fed, inducing a demand-sapping recession. Comments regarding refilling US Strategic petroleum reserves added to the market volatility. Meanwhile, last week witnessed the most significant weekly SPR drawdown in US history, taking the emergency oil reserves to the lowest level since October 1984, as the government set a plan in March to release 1 million barrels per day over six months to tackle high fuel prices. 

Almost 8.4 million barrels of oil have been released from reserves, equivalent to 1.2 mbpd of release. Once again the momentum has picked up and this is the reason why we are seeing a rise in commercial crude inventories. On the supply side, the risk of disrupted rail shipments for crude and other products in the US amid the prospects of a labour dispute limited the downside.

Outlook: Oil might come under pressure ahead of the FOMC meeting

Crude oil has started the week on a positive note, amid reports that the Chinese city of Chengdu lifted a two-week lockdown, raising hopes of wider reopening throughout the country and boosting the demand outlook in the world’s largest crude importer. Stimulus measures are helping the recovery in China, which has been dampened by the zero covid policy and lockdowns. 

Also read: Gold Price Today, 20 Sep 2022: MCX gold falls ahead of US Fed policy decision; check support, resistance

Meanwhile, Iraq has resumed crude oil exports from Basrah oil terminal after an oil spill that occurred late 15th September halted loadings from the facility, curbing some 1 million b/d of exports from OPEC’s second biggest producer. Global oil consumption is being threatened by a darkening economic outlook. A hawkish US Federal Reserve, looming recession in Eurozone and China’s zero covid policy might add to demand concerns. Investors await two major central bank meetings this week – the Fed and the Bank of England. Fed is expected to deliver another jumbo-sized 75 bps hike, while BoE might go for 50 bps and raise concerns of a recession. Talks of recession and aggressive rate hikes might weigh down on oil demand and prices. We recommend a sell on rise strategy and expect prices to decline towards Rs.6,500 per bbl for the week. A bounce back could be seen in the event of a less hawkish Fed. 

(Royce Vargheese Joseph is a Research Analyst, Commodity at Anand Rathi. The views expressed are the author’s own. Please consult your financial advisor before investing.)