Financial Daily from THE HINDU group of publications
Monday, Nov 10, 2003
Agri-Biz & Commodities - Insight
Bringing price stability to futures
Macroeconomic developments demand that the stability in commodity prices is promoted by way of market expansion and allowing indicators to develop for a proper allocation of resources so as to ultimately help the growers. In this effort, promoting futures, for risk management and price discovery, appears to be a better bet than stabilisation funds and subsidies, be they through minimum support prices or minimum guarantee of prices (MSPs/MGPs).
Risk in production management is not always exogenous oversupply, slack demand and technology change are often to blame. It would only be rational to recognise such risks and act in time. For instance, coffee, rubber, tea, and tobacco growers are of the view that there is overproduction and that the prices do not cover even the variable costs. But they are unsure of when to stop, shift or diversify production. The information and analysis mechanisms are not perfect.
In India, a fund has been created to bring price stability, aimed at helping the growers, especially the small, when prices decline, and obtaining contributions when prices rise. In practise, such measures can lead to instability and cause a general crisis in the linked sectors (in plantations themselves, for instance). Reducing the losses of small growers merely shifts the pressure to the state or other institutions involved in bailout. This is discriminatory indeed. The cross-sectional and temporal factors are not taken into account. Why should the future generation bear the burnt of the inefficiencies of the present which has state support?
A more efficient and viable market mechanism for risk management and price discovery is futures, especially if there is wide stakeholder participation. From a macro-development angle, this should happen with appropriate measurement of risk. The current emphasis on reporting on trading turnover, be it in the stock or commodity market, lacks a macro-development framework. For example, resource mobilisation by the capital market has not kept pace with the increased turnover handled by the two mega bourses the NSE and the BSE. On the other hand, small investors and small towns with meagre resources have suffered all along mainly because risk measurement has not increased concomitantly with liberalisation. This has led to a narrow development of the market. Recently, the Securities and Exchange Board of India (SEBI) set up a Market Development Committee to go into this aspect.
A macro-development approach would require the market to be a financial intermediary so that savings and investment rates rise, thereby boosting GDP growth and employment. Similarly, in commodity futures, risk measurement, risk management and price discovery need to help macro-developments insofar as agricultural market reforms are a must to enable agriculture grow in terms of GDP, realising higher value-addition and employment in the process.
The speculative nature of futures is the Achillies' heel of the market. So are the illegal trade and round tripping, all to avoid transparency and taxes. Such phenomena persist and traders have qualms about claiming that the reported trade is only a fraction of the trading activity taking place outside the regime. This apparently subverts the regulation and macro-development and, thus, public interest.
An ideal growth framework would be one in which micro- and macro-level structures work in tandem. Such a working would maximise the value-added and contribute to GDP growth and employment. Ensuring this requires crafting of certain indicators, a system for dissemination of information on trading and prices, both spot and futures, that makes full use of the latest ICT.
How the combining of micro-macro development frameworks would be of advantage the economy is brought out in the Table.
Given the `noisy' nature of the Indian wholesale and retail markets, particularly in essential items such as wheat, rice, oilseeds and edible oils, symmetry in dissemination of real-time spot and future prices will help consumers at large.
(The author is Senior Economic Adviser, Department of Consumer Affairs, at Kochi. The views are personal.)
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